Market Outlook for 2025 (Part 1)
11/26/2024
We experienced two consecutive years of returns exceeding 20%, which might lead some investors to anticipate a major correction. However, as the chart above illustrates, history suggests that two consecutive years of 20% gains are not, by themselves, a reason to be bearish. In fact, in 6 out of 8 instances, the stock market ended higher in the following year.
We believe that fundamentals and macroeconomic factors remain the primary drivers of the stock market's outlook. As we move further from the disruptions of the COVID economy, we're seeing signs of transformation, characterized by faster growth, low unemployment, and higher inflation. Key drivers include the end of historically low interest rates, policies supporting national industries, and an influx of foreign capital.
Below is a quick preview of our 2025 outlook
Growth:
We maintain a strong stance on U.S. economic leadership, anticipating 2.5% above-consensus GDP growth and 10% earnings growth for 2025, with a low risk of recession. Financial easing is underway across most developed markets, and we expect further rate cuts in 2025, though at a slower pace.
Given the high expectations for big tech earnings, we foresee the market broadening, with more growth coming from mid-cap, small-cap, and private markets.
Opportunities:
Key trends shaping the market include digitization, deglobalization, geopolitical instability, and demographic aging. We should focus on investing where AI, energy, and politics (especially deregulation) intersect, particularly in AI applications, power generation, utilities, industrials, and financial services.
Risks:
Bullish sentiment is prevalent on Wall Street, with a historically low put/call ratio, which could heighten the risk of market volatility due to profit-taking and sudden shifts in sentiment.
The impact of tariffs remains uncertain at different economic stages. The first 100 days of the next U.S. administration will be crucial for assessing legislative priorities. Key indicators to watch in 2025 are the direction of the U.S. dollar and inflation, as they could contribute to market volatility.
Sources: Carson Investment Research
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