Market outlook for 2025
In this weeks video insight, I discuss two schools of thought regarding stock market forecasts for 2025 – one cautious, the other more hopeful.
The pessimists suggest that the deteriorating global and U.S. economic picture will stop the S&P 500’s rally in its tracks. Suggesting that elevated market valuations amplify investor sensitivity to negative news. They also consider that Trump’s unpredictability is a source of market volatility, which weighs heavily on investor confidence.
However, there are those who are more optimistic – suggesting that the worst of Trump-inspired uncertainty is behind us, and that a softer iteration of tariffs will ensue. Suggesting that this could cultivate an environment of opportunity for investors, as markets stabilise.
Transcript:
Roger: The forecasts for the stock market this year are bookended by those who believe a deteriorating global and U.S. economic picture will stop the S&P 500’s rally in its tracks, (with the market retesting and perhaps exceeding its recent lows)… and those who believe the worst of Trump-inspired uncertainty is behind us, a much more palatable version of tariffs will ultimately prevail, and the market will roar to new highs this year.
Over the last few years, we have urged investors to consider the combination of inflation and growth to help determine whether equities would experience buying support. Historically, well, since at least the 1950s, the best returns from equity markets can happen during or after a period Gavekal Research called a ‘Disinflationary Boom’ – when disinflation coincided with positive economic growth.
With Trump likely to settle on some combination of tariffs that are lower than the Liberation Day version, the question to ask is whether U.S. inflation rates will decline further or whether inflation will rise even as tariffs settle at 10 per cent generally and 30 per cent on imports from less friendly trading nations.
Regarding economic growth, the consensus amongst economists is rapidly shifting from recession to slowing growth, but not negative. It’s worth noting that imports are subtracted in the calculation of Gross Domestic Product (GDP) in the U.S. This is because GDP measures the total value of goods and services produced within a country’s borders, and imports represent production that occurred outside the country. So the very high volume of imports that occurred in the first quarter, as importers front-ran Trump’s tariffs, reduced GDP, resulting in the U.S.’s first quarter of negative economic growth. That’s unlikely to be repeated.
With respect to inflation, my guess is that we may see inflation persist around current levels or even slightly higher – if that is wrong and inflation keeps declining, it will be good news –but even if it is slightly higher, I believe investors will look past the current turmoil with something of an optimistic bias. Trump appears to be easing into a disposition towards change and upheaval that is more market friendly.
That said – there are always risks and Warren Buffett’s staggering pile of cash along with the comment that he’ll be hanging around where needed after his retirement in case of “special opportunities” does suggest it may be sensible to also hold some cash on the sidelines.
Turning to market valuations, with the exception of Covid19 and the recent market highs, the price-to-earnings (P/E) ratio for the S&P 500 is higher than at any other time in the last 23 years. Of course, that doesn’t mean anything – P/E ratios can stay high forever – by themselves high P/E ratios don’t predict a crash or even a correction – but they do make investors more sensitive to any bad news.
For what it’s worth, I said at the beginning of the year, that 2025 would deliver heightened volatility thanks to Trump and that S&P 500 returns should be mildly positive – I suggested single digit positive-returns. That was partly based on historical precedents – I don’t think we have ever seen three consecutive years of high double-digit returns. As long as growth remains positive, or that investors can see that it will remain positive, and inflation doesn’t surge or if it does, it isn’t expected to persist, then the outlook for the rest of the year remains modestly supportive.
The risk is Trump himself. I remain convinced that he goes to bed not knowing what he’ll say tomorrow – although it’s reasonable to assume he will say and do things that benefit him and his family. Perhaps that’s the best investing strategy after all. When the U.S. cuts a deal with China on tariffs over a weekend, should we be surprised that the details aren’t announced until a market trading day?
That’s all we have time for today. See you next week and in the meantime continue to follow us on Facebook and X.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
