2025 financial forecast: What to expect in mortgages, investing, banking, and credit cards

Credit Card Trends: What to Expect in 2025

For the last year, the economy showed significant growth: Inflation decreased while interest rates were reduced. Unemployment continued to remain low, and the S&P 500 jumped over 20%. But a new administration, shifting financial policies, and continued pandemic recovery-the question is: what lies ahead for 2025?

Mortgages

Recently, it became quite popular to expect a cut of mortgage rates by a large share in 2025. But with the unpredictable market reactions after the Trump presidency, economists reconsidered their forecasts and resulted in a more conservative outlook in regards to future rates. Analysts at Zillow, Redfin, Fannie Mae, and the Mortgage Bankers Association now expect mortgage rates to stay above 6% for all of 2025.

Home inventory and pricing

Consumer demand for housing far surpasses supply. While Freddie Mac reported that an approximate 5.8 million new homes have been completed within the U.S. during the last four years, the demand has grown at this level as well.

It took us about a decade to get into this housing deficit, and it's probably going to take us about a decade to get out," said Rob Dietz, chief economist for the National Association of Home Builders.

When the number of house-seeking buyers is greater than available houses, the market moves back to a seller's market, which makes prices move up. In such situations, it favors current sellers whose equity rises with these prices, but puts on pressure on home-seeker buyers who are in need of affordably priced homes.

Investing

Investors can look forward to an interesting year ahead. In the United States, a good business climate, falling interest rates, and the possibility of lower corporate taxes can be good for earnings growth. But the high valuations are making many investors uneasy.

S&P 500 in 2025

S&P 500 to deliver decent returns in 2025 and experience variations through the year. However, according to Marta Norton, the chief investment strategist at Empower- retirement plan provider, there's a case for gains on large-cap stocks and that macroeconomics trend favor them with the increase integration of AI.

Norton identifies valuation as the significant opposing factor. Valuation, in this case, means the relationship between the prices of stocks and the earnings, as well as other fundamental business metrics. When valuations are high, investors will be willing to pay more for earnings, usually on an expectation of strong growth. If growth doesn't meet expectations, volatility could rise.

Small- and mid-cap stocks in 2025

By 2025, small- and mid-cap stocks should have a potential for outperforming the S&P 500. The reason for that trend will probably be connected to the considerable benefits experienced by smaller companies from less interest rates and potential cuts of corporate taxes.

David Rosenstrock of Wharton Wealth Planning noted that smaller and middle capitalization companies tend to adopt variable-rate debt more, whereas larger corporations generally will use fixed-rate. It can take a company immediately benefiting from the cut of interest rates in the instance of variable-rate debt where its financial obligation is re-priced without any delay in time. However, variable-rate debt is not subjected to lower rates until that particular debt is refinanced.

Tax cuts most likely favor small and middle-cap companies since most revenue is usually generated in America. According to Rosenstrock, "Lowering the corporate tax rate would likely provide more significant benefits for these asset classes than would be the case for the large-cap firms, with a more dispersed geographic makeup of their revenue."

Banking

In banking, analysts forecast that consumers will see significant changes in the next year, especially in terms of the federal funds rate.

"Sophia Kearney-Lederman, FHN Financial senior economist said, 'We expect the Fed to take a more gradual pace of easing next year, starting with 25 basis point cuts at alternating meetings and then pausing mid-year. Our forecast includes a 25 basis point reduction in both the first and second quarters of 2025, which would put the fed funds target rate in a range of 3.75% to 4.0%. After that, we think the Fed will hold steady for the rest of the year.

"Our forecasts for the 2025 federal funds rate rest on two main assumptions: first, that inflation will rise mid-year on the back of temporary tariff pressures, and second, that the unemployment rate will fall as a consequence of changes to immigration policy, including a reduction in deportations relative to campaign promises. This interplay of rising inflation risks and falling unemployment rates is likely to spur the Fed to reassess its easing strategy in 2025."

If the federal funds rate continues to decline as expected, the interest earned on such savings accounts, money market accounts, high-yield savings accounts, and even certificates of deposit may too.

Credit cards

It can be noted that following the cut in the target federal funds rate range by the Federal Reserve earlier this year, some credit card interest rates have been observed to come down. As we go into the new year, analysts expect more cuts in the Fed's rates but are unsure of the velocity and depth of the rate cuts.

Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, said at the Yahoo Finance Invest conference in November 2024 that the Federal Reserve would have to "wait and see what the data says" before making decisions about interest rates in 2025. Recent expert analyses indicate the pace of rate cuts might slow down in 2025.

In the event that the Fed decides on another round of rate cuts, credit card interest rates should decline further. However, this will be no more significant than 2024 and still not be enough for most to cause a serious shift in their APR; current average credit card interest rates surpass 21%. Even if the Fed's target rate range goes down by one full percentage point or even more, it is wise not to delay your efforts in lowering your balances because such will not affect your APR in a meaningful way, and delaying could result in carrying higher debt.

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