These Are the Biggest Risks to 2025's Market Stability That Stock and Bond Investors Fear

Investor concerns about the biggest threats to market stability in 2025 have shifted compared to last year, with a global trade war now viewed as the top risk, according to a report from Deutsche Bank Research. This concern has gained prominence as the U.S. prepares for President-elect Donald Trump’s inauguration, highlighting fears that his trade policies could disrupt economic stability.

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Jim Reid, Deutsche Bank’s global head of macro and thematic research, stated in a note on Monday that the primary risks to global markets are a potential global trade war, a significant downturn in the U.S. technology sector, and uncertainties around inflation and bond yields. These findings mark a notable change from December of last year, when a “hard landing” for the U.S. economy was the most pressing concern for investors.

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Despite worries heading into 2024 that aggressive Federal Reserve rate hikes could push the U.S. into a recession, the economy has demonstrated resilience throughout the year. However, Trump’s proposed trade policies, particularly the possibility of introducing more tariffs, have reignited concerns about inflation, which remains stubborn in some areas despite cooling from its 2022 highs.

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While the Federal Reserve began loosening its monetary policy in September in response to easing inflation, investors remain wary of the risk of unexpected interest rate hikes by central banks aiming to further combat inflation. Such moves are ranked among the top three threats to market stability in Deutsche Bank’s research.

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Bond market volatility continues to be a focal point as the Fed adjusts its policies to achieve its 2% inflation target. Investors are particularly concerned about sharp increases in bond yields, which can disrupt stock market valuations. For instance, the yield on the 10-year Treasury note, a key benchmark for equity valuations, rose to 4.397% on Monday, based on Dow Jones Market Data. Significant and abrupt increases in this yield pose risks to stock prices by unsettling investor confidence.

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The Federal Reserve’s upcoming two-day monetary policy meeting is also attracting attention, with a decision on interest rates expected on Wednesday afternoon. Any surprises in this announcement could have ripple effects on both bond and equity markets.

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This year, the S&P 500 has rallied strongly, fueled partly by excitement surrounding artificial intelligence (AI) and its transformative potential. Big Tech companies, which dominate the equities index, have been significant beneficiaries of this enthusiasm. Nvidia, a leading producer of AI chips, serves as a prime example. The company, now valued at nearly $3 trillion, has seen its stock price soar by more than 166% in 2024, according to FactSet data.

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However, investors see a potential downturn in technology stock valuations and a decline in AI-driven optimism as the second-largest threat to market stability in 2025, trailing only concerns about a global trade war. These risks are reflected in Deutsche Bank’s findings, underscoring how pivotal the tech sector has become to the broader market.

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On Monday, the U.S. stock market ended mostly higher, with the Nasdaq Composite climbing 1.2% to a record close, according to Dow Jones Market Data. The S&P 500 gained 0.4%, while the Dow Jones Industrial Average dipped 0.3%. These movements highlight the varying performance across different sectors of the market.

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Year-to-date, the S&P 500 has surged 27.3%, while the Nasdaq has posted an even more impressive gain of 34.4%. Meanwhile, the Roundhill Magnificent Seven ETF, which tracks the so-called Magnificent Seven Big Tech stocks, has skyrocketed by 73.2% in 2024, based on FactSet data.

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Looking ahead, Deutsche Bank’s global markets survey predicts a moderate 6.8% increase in the Magnificent Seven’s collective value in 2025. For the S&P 500, a more subdued gain of 5.2% is anticipated. These projections suggest that while the remarkable growth of 2024 may slow, investors still expect continued, albeit more tempered, momentum in the market.

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In summary, as 2025 approaches, investor attention has shifted from fears of an economic hard landing to concerns about geopolitical tensions, inflationary pressures, and the tech sector’s sustainability. The global trade landscape and central bank policies will likely remain critical factors influencing market dynamics in the coming year. Meanwhile, the tech-driven rally that has defined 2024 highlights both the opportunities and risks associated with heavy reliance on a few dominant companies.

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