The S&P/ASX 200 Index (ASX: XJO) is likely to experience higher volatility, including a 15% correction, in 2025 but will ultimately finish the year higher at about 8,800 points.

That's the prediction from Dr Shane Oliver, Chief Economist and Head of Investment Strategy and Economics at AMP Ltd (ASX: AMP).

Let's dig into the details.

More growth ahead for ASX 200 shares in 2025

The ASX 200 closed at 8,420.9 points on Friday, down 0.64% for the day. Based on this closing value, Dr Oliver's prediction amounts to 4.5% growth (excluding dividend returns).

The benchmark index has had an impressive run this year.

It has risen 10.9% in the year to date (YTD) (excluding dividend returns) and has hit new all-time highs on several occasions. The most recent record high was set at 8,514.5 points last Tuesday.

In a new article, Dr Oliver said ASX shares had done well in 2024 "in anticipation of stronger profits and rate cuts ahead".

But they underperformed other equity markets, including US shares, due to concerns about China and no interest rate cuts. By comparison, the S&P 500 Index (SP: INX) has risen by 28.1% in the YTD.

Looking ahead, Dr Oliver expects positive returns for the ASX 200 in 2025 but says a 15% correction during the year is "highly likely". 

Dr Oliver writes:

Stretched valuations after two strong years, the ongoing risk of recession, the likelihood of a global trade war and ongoing geopolitical issues will likely make for a volatile ride in 2025 …

Dr Oliver said ASX 200 shares are "not cheap", trading on a forward price-to-earnings (P/E) ratio of 20x. This is less than US shares, though, which are trading on a forward P/E of 26x.

What about interest rates?

Dr Oliver said there is a risk of recession in 2025, especially "if the RBA leaves rates too high for too long".

The economy is certainly anaemic.

Gross domestic product (GDP) rose by just 0.3% in the September quarter and 0.8% over 12 months, according to data released by the Bureau of Statistics last week.

Dr Oliver expects the Reserve Bank (RBA) to cut interest rates by 75 basis points over the year to 3.6%.

In terms of the property market, Dr Oliver expects home values to cool further in the first half of 2025 before rate cuts provide a boost in the second half.

A warning on ASX 200 mining shares

Darren Thompson, Head of Asset Management at Equity Trustees Asset Management, has concerns about ASX 200 mining shares in 2025.

Due to lower iron ore prices, Thompson expects "materially lower" market earnings for major resources shares, including Fortescue Ltd (ASX: FMG), BHP Group Ltd (ASX: BHP), and Rio Tinto Ltd (ASX: RIO).

He commented:

These companies remain highly profitable, cash generative business.

It is simply that iron ore prices have continued to retrace from previous cyclical highs, largely due to lower demand from China … . 

Thompson notes the miners play a big role in the ASX 200's typical 4% to 4.5% annual dividend yield. He says the 12-month forward dividend yield is tracking much lower at about 3.4% for 2025.

He also points out that the ASX 200 is trading at high valuation multiples compared to long-term averages, particularly given the likelihood of relatively low near-term earnings growth.

"In our view, this leaves little buffer to absorb adverse developments," he said.  

Thompson added:

Overall, much of the good news anticipated for CY25 appears priced into market expectations and investors should expect much more muted capital returns and flat or lower income in the year ahead.