The U.S. economy just recorded inflation of 3 percent in January, continuing a rise that began in September, when inflation bottomed at 2.4 percent. The rise in prices now has some economists questioning whether the Federal Reserve will lower interest rates this year, as it had been expected to do. If rates don’t decline, it could mean a reversal in the stock market, as investors price in higher-for-longer rates and the uncertain effects of President Trump’s tariffs.
With the Fed holding steady on rates for now, four straight months of rising inflation and the S&P 500 stock index near all-time highs, is it still a good time for investors to buy stocks?
Rising inflation cools the Fed’s desire to lower rates
Inflation has shown an uptick since the September inflation report, with year-over-year prices climbing with each passing month. This inflation, along with the uncertainty of Trump’s economic policies such as tariffs and further deficit spending, have the Fed saying that it’s holding off on more rate cuts until the picture becomes clearer and inflation is moving in the right direction. Lower rates generally buoy the stock market and make stocks a more attractive investment.
Does that mean rate cuts are off the table for 2025? No, say market watchers.
“There is still potential for lowering rates, but with the recent tariffs potentially leading to inflationary pressure, the Fed looks to be planning a ‘wait and see’ approach, particularly regarding inflation and employment trends, before committing to further direction,” says John Bergquist, president of Elysium Financial in South Jordan, Utah.
Others say that while rate cuts aren’t off the table, they’re not all that likely to happen.
“Sure, there is a potential the Fed could cut a lot more this year, but the market is really saying it’s a very low probability,” says Brian Spinelli, co-CIO at wealth advisor Halbert Hargrove. “Current pricing seems to indicate moderate probabilities that we get one or two more small cuts this year.”
Still, others expect one or two rate cuts by the end of the year, such as Chris Berkel, investment adviser, president of AXIS Financial in Edmond, Oklahoma. “This expectation stems from the Fed’s long-standing communication regarding rate reductions, which I think has effectively locked themselves into rate cuts,” he says.
For now, analysts don’t seem to be speaking much about the potential for the Fed to do an about-face and actually raise rates in the face of rising inflation. Such a move could force investors to take a much harder look at stocks. But the improbability of this event — the fact that investors aren’t expecting it — means that any change in the Fed’s posture would impact the market.
Is now the time to buy stocks?
That macroeconomic backdrop of interest rates is important, but it’s only part of the story. Stocks are also driven by their earnings growth, and earnings expectations remain strong for this year. Overall, analysts expect the S&P 500 index companies to grow earnings 13 percent in 2025, according to LPL Financial.
That level of growth could help keep a floor under the S&P 500, which sits near its all-time peak. The index rose more than 20 percent in both 2023 and 2024 and now trades at a high valuation. Given this valuation and the economic uncertainty, investors may be getting a little nervous. In fact, the S&P 500 is nearly flat since the day after Trump’s election, which saw stocks spike.
With a high valuation and the uncertain economic situation — inflation, interest rates, tariffs and more — is it time to buy stocks? Analysts say it depends heavily on your time frame.
“Even with all the uncertainty, I still believe the stock market has legs to run and is still a good time to invest,” says Bergquist. “It’s important to remember that if your investment time horizon is long, you shouldn’t overreact to short-term volatility. Overreaction is the No. 1 cause of investors’ underperformance.”
Investors often try to take a short-term mentality to the market, trading in and out for short-term gains. This approach of “timing the market” often means that investors sell out at the start of a big run and miss it. Alternatively, when stocks are falling, they hold on and ride stocks lower, only to sell near the bottom, and then eventually stocks bounce higher and they miss out there, too.
If they try to time the market, investors likely won’t enjoy stocks’ strong long-term returns — the S&P 500 has risen about 10 percent annually on average over time. Instead, investors must realize that enduring short-term volatility is the price of enjoying long-term returns.
“It’s also a good reminder that stocks always face uncertainty and, therefore, expect volatility when surprises come along,” says Spinelli.
It’s also important to remember that uncertainty comes and goes. The market is always worrying about something, and many times that worry ends up having little effect.
“The political landscape is unlikely to have a meaningful impact on long-term investment strategies,” says Berkel. “ While elections and political headlines can create short-term market volatility, the foundational principles of investing remain unchanged across different administrations.”
So investors who focus on the long term with a diversified investment portfolio and add to their investments are likely to do fine, especially if they can use a down market to invest more.
How should investors invest now?
If you’re buying stocks with the expectation of short-term gains, you’ll need to steel yourself. It’s only possible to know in retrospect that the market has bottomed, not in the midst of a fall. Those looking to time the market — always a dicey prospect — need to carefully watch for fear in the market, especially when it’s accompanied by severe declines in stock prices. Then they’ll need to have cash at the ready and be able to choke down their own (likely) overwhelming fear.
But investors looking to build wealth over a longer period of time needn’t be too focused on hitting the bottom of the market, however. Instead, their returns will come from adding to their portfolio regularly over time — including when stocks bottom out but also when they rise again. The stock market could still have significant volatility on the way as worries arise.
“Investors should be focused on whether their overall portfolio allocation is appropriate for the investment time horizon they have left and their ability to make it through unforeseen periods of volatility,” says Spinelli. He suggests fixed-income investments such as bonds, which may pay more than cash and reduce the overall portfolio’s volatility for those with a shorter time frame.
One good approach is to add money to the market on a regular basis, investing weekly or monthly, using dollar-cost averaging to reduce the risk of buying at a too-high price. You’ll buy less when prices are high and buy more when prices are low, spreading your risk out over time.
If you’re investing regularly in your 401(k), for example, and you have nerves of steel to continue doing so during a downturn, then you’re taking advantage of dollar-cost averaging. For many investors, setting your investments on autopilot is the best way to take your emotions out of the process and still keep investing at lower and lower prices as the market declines.
For those who do need access to their cash over a shorter time frame, however, cash is where they need to be.
“If you expect to need to access your funds in the foreseeable future, you may be better off keeping your funds accessible in cash,” says Gary Zimmerman, CEO, MaxMyInterest. “Just make sure that they’re sitting in high-yield bank accounts, where they can keep pace with inflation. Money that sits in non-interest-bearing accounts is actually losing real purchasing power each year.”
Bottom line
While the Fed’s actions may throw the market for a loop in the short term, investors should be focused on the long term and leave “timing the market” to the professionals. If the investment picture becomes clearer, stocks have a habit of rising before investors can repurchase their positions, meaning they’ll miss out on significant gains while they’re trying to avoid losses.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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