U.S. Investment & Economic Outlook 2025
Henry Bowers
July 05, 2025
About me
I am Henry Bowers, currently pursuing a Master of Science in Economics at Purdue University’s Mitch Daniels School of Business. I have always been interested in learning data science for finance and economics to make more informed investment decisions. After taking online courses through DataCamp and reading numerous articles on R, I decided to enroll in a capstone course in financial econometrics during my undergraduate studies. Throughout the class, I gained further knowledge about risk management and data visualization of time series. I am developing a growing passion for understanding data science and applying those skills to improve my investment decisions for my portfolio using computational investment strategies with R programming. Skills I have developed include multi-asset portfolio construction, optimization, risk management, and volatility modeling. In my current master’s program, I focus on financial economics and economic policy, combining these areas to gain a deeper understanding of how financial markets influence economic policies and vice versa.
Should You Continue Investing?
2025 has been a very volatile year thus far for global equity markets. When comparing the US equity market with international equities, we can notice that US equities are falling behind in returns.
As of the writing this report, German equities are leading the way in performance compared to other top-growing nations. This showcases the importance of why investors need to have exposure towards international markets, either through country-specific ETFs or a total international equity ETF such as VXUS, which is also outperforming the SP500. Investors should never be 100% invested in one region, as the world evolves, so will new investment opportunities. With rising global political risk and tariffs, this is affecting all nations and financial markets, even though some nations’ equity markets are doing better than others. This research report is to spread awareness and potential risks investors may face throughout 2025, and my opinion on where the markets and economy are heading.
| Asset | Annualized_Return | Annualized_StdDev | Max_Return | Min_Return | Max_Drawdown |
|---|---|---|---|---|---|
| United States | 13.72 | 17.37 | 10.50 | -10.94 | 33.72 |
| Canada | 5.13 | 19.00 | 12.86 | -13.32 | 42.66 |
| France | 6.61 | 22.51 | 9.10 | -12.68 | 39.23 |
| Germany | 6.27 | 22.72 | 10.76 | -12.69 | 46.80 |
| United Kingdom | 5.09 | 19.28 | 11.55 | -11.99 | 43.33 |
| China | 3.28 | 25.88 | 19.68 | -11.38 | 60.23 |
| Japan | 5.55 | 17.89 | 7.61 | -9.80 | 33.14 |
| Total International Equity Market | 5.52 | 17.83 | 8.38 | -11.13 | 35.97 |
| Total World Equity Market | 9.58 | 17.40 | 9.14 | -11.64 | 34.24 |
When comparing the U.S. equity market to international equity markets, the U.S. has delivered not only higher annualized returns but also lower volatility over time. While U.S. equities may underperform their international counterparts in the short term (as shown above in the cumulative return chart 2025 YTD), the U.S. market is expected to continue outperforming in the long run.
Out of 763 monthly observations gathered from January 1962 to July 2025, the S&P 500 earnings yield and the 10-year Treasury yield have historically tended to move in the same general direction. To better understand this relationship, we examined whether the equity risk premium (ERP) the difference between the S&P 500 earnings yield and the 10-year Treasury yield—was more often positive or negative over time. The results show that the ERP was positive in 387 observations and negative in 376 observations, indicating that equities offered a higher yield than bonds 50.72% of the time and a lower yield 49.27% of the time. This finding suggests that, while equities have been marginally more attractive than bonds over the long term, the difference has not been significant enough to justify excluding bonds from a well-diversified investment portfolio. Bonds continue to play a crucial role, particularly during periods of high interest rates, when they can provide stable income and help offset potential equity market losses. Currently, bonds are becoming increasingly attractive relative to equities, as the ERP has once again turned negative a dynamic not seen since the 2008 global financial crisis.
Historical Market Returns and Risk
The U.S. equity market is not perfect. By utilizing Yahoo Finance to retrieve SP500 data dating back to 1928 via the GSPC ticker, we can observe that over the past 98 years, there have been 67 years of positive returns and only 31 years of negative returns, providing historical evidence that the market has achieved a 68% win rate.
Heat maps are very useful as well when analyzing time series data, to get a much clearer picture of how each month performed during certain periods. Notably, in October of 2008, the equity market collapsed by 17% because of the housing bubble. It was not until 5 months after March 2009 that investors started to see returns after losing money in the market for 5 straight months, with over 20% losses during this period. When looking back at 2022, which was a very volatile year for global markets as well, due to the Russian invasion of Ukraine. Russia’s actions towards Ukraine had a domino effect on equity markets across the globe, especially the U.S, as in some months we saw over 8% in losses, causing fear amongst investors. With global political tensions only rising, we should expect to see even more volatility across equity markets.
Over the past 98 years, the SP500 volatility has undergone significant changes as the world has evolved, navigating both domestic and global political shifts. For this research, I am utilizing the GJR-GARCH volatility over the rolling standard deviation model because GJR-GARCH tends to rise more sharply in response to negative news than to positive news. Although rolling standard deviation represents an improvement over static standard deviation by updating over time, it still has key limitations that the GJR-GARCH model addresses. The rolling standard deviation uses a fixed window (e.g., past 12 months) to estimate volatility, which may smooth out significant changes and fail to react quickly to sudden shifts in market conditions.
Additionally, it treats all returns equally, meaning positive and negative returns have the same impact on the volatility estimate. The GJR-GARCH model, conversely, is a more sophisticated model-based approach that offers the following advantages: it dynamically updates volatility forecasts based on recent data; it assigns greater weight to negative shocks, reflecting the leverage effect, where adverse news tends to heighten market volatility more than favorable news; and it accounts for volatility clustering, where high-volatility periods tend to follow one another. This makes GJR-GARCH significantly more responsive to current market behavior and more accurate in forecasting future volatility. For investors, this is crucial—especially during turbulent periods—because rolling standard deviation may underestimate risk right before or during a volatility spike. GJR-GARCH provides a forward-looking, asymmetric, and adaptive measure of risk, making it a more robust tool for managing market volatility.
Despite global conflicts, the U.S. equity Market rebounded, achieving higher returns, benefiting investors for the long term. Especially during times of political crisis, it is most important for investors to think about +10 years ahead. By staying invested in the market to fund your retirement goals, there’s already a historical 68% chance that the U.S. equity Market will be positive regardless of global conflicts. My strategy for handling this turbulent market is to diversify across asset classes.
Is the U.S Economy Prepared For Global Political Conflicts?
As political tensions rise globally, we have already seen equity markets start to become more volatile during this time. However, since equity markets are forward-looking, they don’t always reflect how the economy is doing. Throughout this section, we will examine several growing concerns, such as the impact of rising interest rates on debt, the costs associated with increasing inflation, inflation-adjusted metrics, and where the government is allocating its spending.
Debt is a crucial factor for any country, as it can lead to drastic changes in economic decision-making. If a country has too much debt, it could eventually face financial distress, prompting cuts to important programs that many citizens depend on, which can lead to higher unemployment and economic collapse. Using data from U.S Treasury official website, we can observe that total public debt growth is slowing; however, during recessionary periods, growth typically skyrockets due to the government taking on more debt to help fund operations.
Currently, the nominal GDP-to-debt ratio stands at 121%, and the inflation-adjusted GDP-to-debt ratio is at 154%. This large difference results from increased inflation over the past few years, as higher inflation weakens the real value of GDP. At this moment, the United States owes more in debt than its economy is producing. At the start of 2025, the Peter G. Peterson Foundation released its projections for the debt-to-GDP ratio. They project that by 2055, federal debt held by the public will reach nearly 160%. CBO anticipates that federal spending will rise from 23.3 percent of GDP in 2025 to 26.6 percent in 2055, according to the agency’s March 2025 long-term projections. Revenues are also projected to increase during that period, albeit more slowly, from 17.1 percent of GDP in 2025 to 19.3 percent in 2055, which means deficits will continue to grow in the decades ahead.
As of May 31st, 2025, the U.S Government paid out 83 billion from public interest expense, due to decade record high interest rates, we are certainly seeing a drastic increase. If interest rates stay at this level and debt continues getting larger, I fear that by the end of 2025, the U.S. government will have paid out nearly 100 billion. This would be much more than they spend on Medicare or even Social Security. It is important to mention that because of sticky inflation, the Fed is maintaining its policy rates at 4.5% to help lower inflation. However, with Trump’s tariffs, the FED is projecting this would increase inflation, giving them less confidence now is not the time to continue cutting rates, but instead keep rates where they are, as their primary goal is to make sure employment and inflation are stable.
Decade-high inflation has been negatively impacting our overall economy, making the cost of living and total expenditures more expensive for the average American and slowing growth. As stated by the U.S. Bureau of Economic Analysis in the June 2025 GDP release, the decrease in real GDP in the first quarter mainly reflected an increase in imports, which are subtracted in the calculation of GDP, and a decrease in government spending. These movements were partly offset by increases in investment and consumer spending. When considering tariffs, this could significantly impact businesses, as they are the ones paying the tariff tax; however, most companies will likely pass the expense onto consumers, raising inflation in the short term and causing a slowdown in economic growth. Data from the past few years show GDP growth trending downward, primarily due to the conflict in Europe, which initially had a major impact on global economies. Currently, the United States is accumulating more debt than the economy can produce, and due to current policies on tariffs, this is also hindering economic growth. Instead of expanding, the United States is contracting as Real GDP in Q1 2025 decreased by 0.5% showcasing the economy has not adapted efficiently towards high inflationary periods.
Medicare and Social security expenditure has been rising fast and more importantly has been coming more expensive for the government to maintain. With the amount of debt the government is taking on, it is already headings towards an unstable path where this could directly affect these spending categories.
Health Care Spending Concerns:
Recently, on June 24th, 2025, the Congressional Budget Office released a statement to the White House in response to “Information Concerning Medicaid- Related Provisions in Title IV of H. R. 1.” CBO estimates that enacting the Medicaid provisions in Title IV of H. R. 1 would increase the number of people without health insurance by 7. 8 million in 2034 compared to baseline projections under current law. Approximately 4.8 million individuals who are able-bodied adults aged 19 to 64 without dependents would lose Medicaid coverage due to not meeting the work-related activity requirement of at least 80 hours per month, as outlined in Section 44141. An estimated 1.4 million people would lose coverage because they do not meet the citizenship or immigration requirements for Medicaid, even though they would be eligible under state-funded programs under current law.
Another 2.2 million would become uninsured due to other provisions in H.R.1, such as stricter eligibility verification rules or state-level changes in Medicaid policy prompted by federal shifts. The Congressional Budget Office (CBO) projects that the combined effect of these policies would result in 600,000 fewer uninsured individuals in 2034 than the total impact of each policy alone, due to overlapping eligibility losses across multiple policies.
The CBO estimates that implementing all Medicaid-related provisions in H.R.1 would result in a net reduction of $ 13.1 billion in state Medicaid spending over 2025–2034. While some provisions would lower state costs, others would increase them. Changes to eligibility, enrollment processes, and certain payment adjustments would reduce state spending by approximately $ 214.4 billion. Conversely, reductions in federal support or other external funding sources would cause states to increase their spending by about $ 201. 3 billion. According to the CBO’s January 2025 baseline, Medicaid spending is projected to be $655.9 billion in 2025, rising to $ 985.7 billion by 2034. If the Medicaid provisions in H. R. 1 were enacted, the CBO estimates that spending in 2034 would be reduced by $125.2 billion, bringing the total down to $860.5 billion.
Research Summary:
There are many valid concerns weighing on investors today, and they are right to be cautious. The U.S. economy is not as strong as it once was, and the rising national debt crisis is not being addressed with the urgency it demands. Without meaningful fiscal action, this growing debt burden will inevitably impact future generations. Additionally, the risk of millions of Americans losing their health insurance and the looming insolvency of Social Security threaten to leave many without essential support during retirement.
Despite these domestic challenges and ongoing global geopolitical tensions, the U.S. equity market has shown resilience. However, it continues to underperform relative to international markets. In my view, now is an appropriate time for investors to consider reducing exposure to high-growth investments and shifting toward more stable, mature companies. These companies tend to exhibit lower volatility while still offering reasonable growth potential.
Currently, the U.S. equity market is heavily concentrated in technology stocks. While it is undeniable that technology will shape the future, a more balanced market is necessary. Earlier this year, political tensions surrounding Taiwan, China, and Nvidia led to significant market volatility—a clear reminder of the risks associated with an overreliance on a single sector. For the millions of Americans whose retirement savings depend on the performance of the S&P 500, it is essential that the market maintains a healthier balance between growth and defensive sectors to ensure more stable, long-term outcomes.
References
The Peter G. Peterson Foundation. (n.d.). Our national debt: Key drivers of the debt. Retrieved July 5, 2025, from https://www.pgpf.org/our-national-debt/#key-drivers-of-the-debt
Bureau of Economic Analysis. (2025, June 26). Gross domestic product, 1st quarter 2025 (third estimate), GDP by industry, and corporate profits (revised) [News release]. U.S. Department of Commerce. Retrieved July 5, 2025, from https://www.bea.gov/news/2025/gross-domestic-product-1st-quarter-2025-third-estimate-gdp-industry-and-corporate-profits
The Conference Board. (2025, June 11). Economic forecast for the U.S. economy. Retrieved July 5, 2025, from https://www.conference-board.org/research/us-forecast
Congressional Budget Office. (2025, June). Re: Information concerning Medicaid‑related provisions in Title IV of H.R. 1 [Letter to the Honorable Jodey Arrington and the Honorable Brett Guthrie]. U.S. Congress. Retrieved July 5, 2025, from https://www.cbo.gov/system/files/2025-06/Arrington-Guthrie-Letter-Medicaid.pdf
The Peter G. Peterson Foundation. (2025, June 18). Social Security faces serious financial shortfalls and other takeaways from the Trustees report. Retrieved July 5, 2025, from https://www.pgpf.org/article/social-security-faces-serious-financial-shortfalls-and-other-takeaways-from-the-trustees-report/
Multpl. (n.d.). S&P 500 earnings yield by month. Retrieved July 5, 2025, from https://www.multpl.com/s-p-500-earnings-yield/table/by-month
U.S. Department of the Treasury, Bureau of the Fiscal Service. (n.d.). Debt to the penny [Dataset]. Fiscal Data. Retrieved July 5, 2025, from https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny
U.S. Department of the Treasury, Bureau of the Fiscal Service. (n.d.). Statements of net cost [Dataset]. Fiscal Data. Retrieved July 5, 2025, from https://fiscaldata.treasury.gov/datasets/u-s-government-financial-report/statements-of-net-cost
Disclosures
Data gathered for research has been downloaded from publicly available databases. Historical returns are also not predictors of future performance. This is not a recommendation to buy or sell any security mention. Opinions written here are of my own and not of my current employer.
Social Security Concern:
The Social Security Old-Age and Survivors Insurance (OASI) Trust Fund is projected to run out of money by 2033, which would result in a 23% benefit reduction. Meanwhile, the Disability Insurance (DI) Trust Fund is expected to remain solvent for the next 75 years. If the two trust funds were combined, their reserves would be exhausted by 2034 — a year earlier than previously estimated. Social Security faces an increasing structural imbalance. The program’s annual cash shortfall is expected to grow from 0.8% of GDP in 2025 to 1.0% in 2034. Over the next 75 years, Social Security has an actuarial shortfall equal to 3.8% of taxable payroll, up from 3.5% last year.
This financial pressure is mainly caused by an aging population: the number of beneficiaries is increasing faster than the number of workers contributing to the system. In 1965, there were 4.0 workers per beneficiary; today, that ratio has dropped to 2.7 and is expected to fall further. Delaying reforms would greatly raise the cost of fixing the program. Acting now would enable gradual, less disruptive adjustments that protect vulnerable populations.
However, if no action is taken until 2034, the necessary tax increases or benefit cuts would need to be about 15% larger than if measures were implemented today. Social Security is the largest federal expenditure and a major factor in the national debt, but it also serves as a vital economic and social safety net. If reforms are not made soon, beneficiaries could face significant reductions in payments. Public opinion is clear: 95% of voters believe it’s important to elect leaders committed to strengthening the program. Policymakers will soon face critical decisions about the future of Social Security, and the good news is, there are many viable options to ensure its long-term stability and success.