Summary
Eight Fundamental Forecasts for 2025 Argus Research Company follows a top-down investment framework, starting with the domestic economy and moving to the global economy, interest rates, equity markets, segments, sectors, and last stocks Here are our eight fundamental forecasts for 2025. Forecast One: The US Economy We expect the US economy to continue to expand in 2024, remaining on a supported growth path by three factors: a salaried consumer, sound corporate investment, and an above-trend government. spend For the past two years, with short-term interest rates at cyclically high levels, we argued that the economy was only a wrong turn or two away from recession. US GDP looks healthier now. By our count, the US economy will have grown at a pace of 2.6% in 2024, down slightly from the 2.9% rate in 2023 but still above the estimated long-term trend growth rate of 2.0%. The key in 2025, as usual, will be consumer spending, which accounts for around two-thirds of overall GDP. At this point, the consumer is bolstered by low unemployment (4.2%), record high stock prices, and rising house prices. A decline in any of these three could lead to a slowdown. We will be keeping a close eye on unemployment claims this year. The recent trend is 200,000 benign per week. If that data point rises above 300k, the unemployment rate could be pushing towards 5.0%. That's when fears of recession will return to Wall Street. Currently, our estimate for GDP growth in 2025 is 1.8%, compared to 2.0% in 2023. Our preliminary forecast for 2026 is also close to that long-term average rate. Outlook Two: Inflation Inflation trends were more important than GDP trends for the stock market in 2022-2023, but their impact faded slightly, as expected, in 2024. That's because the Fed stayed ahead of the inflation curve, after raising the federal funds rate from 0.0% in early 2022 to 5.25% -5.50% by the end of the year 2023, while the core PCE Inflation The index has fallen from 5.5% in March 2022 to the latest reading of 2.8%. Indeed, the Fed has now begun cutting interest rates in order to reduce the FF/PCE gap from the current relatively wide level of 180 basis points (bps). We expect core inflation to slowly edge towards 2.0% in 2025. While far along producer prices are actually falling, sticky prices like shelter and transportation remain high. Wage growth has recently fallen to around 4% year on year. We believe that the Fed, after cutting the fed funds rate by 100 basis points in 2024, will reduce its target overnight lending rate by another 75 basis points in 1H25. Forecast Three: The Dollar/Gold/Oil We look for the dollar to remain at high levels in 2025. The US Dollar Index (DXY) rose by around 4% in 2024, increasing this decline with higher Treasury rates and the problem of President -elect Trump. growth platform. The greenback's current valuation level is about 20% higher than the average over the past 20 years, as the US economy has been in better shape than the economies of trading partners such as Japan, Europe, and even China. The relative strength of the US economy and demand for US investments, including shares of innovative companies, may keep the dollar strong in 2025. Gold is near all-time highs on the back of the dollar rally . The current price of gold partly reflects the perceived safety of hard assets amid global conflicts, such as the Ukraine and the Mideast. The prospect of further Federal Reserve rate cuts is also helping gold, as lower rates reduce the risk of a global economic recession and thus a possible decline in gold bought for jewellery. Looking ahead, our forecast trading range for gold in 2025 is $2,800-$2,300, and our average forecast for the year is $2,600, up from an average of $2,450 in 2024. Oil prices may go to the another address. The most important factor with the price of oil is the supply-and-demand equation, which looks to favor supply over the next two years. Our average price forecast for West Texas Intermediate crude oil in 2025 is $75 per barrel, down from the 2024 average of $78 and recent highs around $120 in 2022. Forecast Four: The Yield Curve The yield curve returned, as we had forecast, to its usual upward slope in 2024 after being reversed for several quarters in 2022-2023. At the short end of the curve, the Fed has replenished its support package on interest rates and made progress in reducing its balance sheet. Because inflationary trends have calmed down, the central bank has already started lowering short-term rates, and we expect further cuts in the first half of 2025. At the end of the long period, aggressive government spending was renewed during the 2024 presidential election campaign. the focus on the level of US debt to GDP. The current rate is 120% inflated. That is not an immediate problem, as the US dollar remains at high levels, signaling to global investors that America is still the leading economy. But deficit spending may well establish a floor on long-term rates in 2025. Our current forecast range for the benchmark 10-year Treasury bond is 3.75-4.75%. Therefore, we predict that the yield curve will steepen in 2025. Forecast Five: Earnings and Valuations Corporate profits grew at a solid high single-digit pace in 2024, after recovering from an earnings recession in 2022-2023. For 2025, we recently raised our forecast for S&P 500 earnings from continuing operations to $276, from $265. Our revised forecast models full-year EPS growth of around 12%. Our increased optimism towards 2025 reflects expected improved performance for three sectors that were negative in 3Q24: Energy, Materials and Industrials. We expect the Energy sector's annual earnings to decline in 4Q24 and 1Q25 before turning moderately positive in the second or third quarter. Materials and Industrials could turn to positive comparisons more quickly, possibly as soon as 4Q24 (Materials) and 1Q25 (Industrials). The strongest EPS growth in 3Q24 came from Communications Services. Another sector that is predicted to grow rapidly next year is Information Technology. Utility growth is forecast to be moderate, but remain above the long-term average. Other sectors projected to grow EPS above their long-term averages in 2025 include Financials, Healthcare, Consumer Discretionary, and Consumer Staples. Meanwhile, equity valuations, according to our Stock/Bond Barometer, have improved during 2024 (despite the rally in stocks). At times in 2023, our barometer signaled that stock prices were more than one standard deviation higher than normal, due to slower earnings growth as well as high inflation and interest rates. At the moment, however, rates have fallen and earnings have improved, so the barometer indicates that stocks are below fair value. On more traditional valuation measures, the current forward P/E ratio for the S&P 500 is around 21, within the normal range of 15-24. The forward two-year P/E based on our estimates and the current price level of the S&P 500 is within 4%-7% of the five-year P/E for the S&P 500. The EPS yield is 4.1% less the real 10-year Treasury bond yield (remember, real yield is nominal yield minus inflation) richer than average, but not at an overvalued level signals. The ratio of the S&P 500 price to an ounce of gold is now 2.3, within the historical range of 1 to 3. We look for stock valuation multiples to expand modestly in 2025, as rates continue to be lower, supporting market returns equity. Outlook Six: Segments and Sectors In terms of market segments, we look for growth to set the pace in 2024 as interest rates decline and EPS growth rises. We expect US stocks to continue to outperform global stocks, based on risk profiles and growth prospects, tempered by valuation. Small-cap stocks also offer relatively low valuations compared to large-caps, but we recommend overweighting large-caps due to the segment's higher growth prospects (especially outside the IT sector) and financial strength. Our model for sector ratings takes into account sector earnings momentum, price action, valuations, and analyst conviction, among other factors. Based on the model, which we run every quarter, our current Overweight sectors are Communications Services