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, stock markets, segments, sectors, and finally, actions. Here are our eight key forecasts for 2025. Forecast One: The U.S. Economy We expect the U.S. economy to continue expanding in 2024, staying on a growth path supported by three factors: an employed consumer, strong corporate investment, and higher than expected government spending. the trend. For the past two years, with short-term interest rates at cycle highs, we argued that the economy was just one or two wrong steps away from a recession. US GDP looks healthier now. According to our calculations, the US economy will have grown at a rate of 2.6% in 2024, slightly below the rate of 2.9% in 2023, but still above the estimated long-term trend growth rate of 2 .0%. The key in 2025, as always, will be consumer spending, which represents approximately two-thirds of total GDP. At this juncture, the consumer is bolstered by low unemployment (4.2%), record stock prices, and rising home prices. A slowdown between any of these three could lead to a slowdown. This year we will closely monitor unemployment claims. The recent trend is a benign 200,000 per week. If that figure exceeds 300,000, the unemployment rate could approach 5.0%. That’s when recession fears will return to Wall Street. Currently, our GDP growth estimate 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. Forecast Two: Inflation Inflation trends were more important than GDP trends for the stock market in 2022-2023, but their impact faded somewhat, as expected, in 2024. This is because the Federal Reserve has stayed ahead of the inflation curve, having raised the federal funds rate from 0.0% at the beginning of 2022 to 5.25%-5.50% by the end of 2023, while the core PCE inflation index has decreased from 5.5% in March 2022 to the latest reading of 2.8%. In fact, the Federal Reserve has begun cutting interest rates to reduce the FF/PCE gap from the current relatively wide level of 180 basis points (bps). We expect core inflation to slowly approach 2.0% in 2025. While producer prices at the higher end are actually falling, sticky prices, such as housing and transportation, remain high. Wage growth has slowed lately to around 4% year over year. We believe the Federal Reserve, having cut 100 basis points from the federal funds rate in 2024, will reduce its target overnight lending rate by another 75 basis points in 1H25. Forecast Three: Dollar/Gold/Oil We expect the dollar to remain at elevated levels in 2025. The US Dollar Index (DXY) rose approximately 4% in 2024, recovering this fall with higher Treasury rates and the proposed President-elect Trump. growth platform. The current level of dollar valuation is about 20% above the average of the last 20 years, as the US economy has been in better shape than the economies of trading partners such as Japan, Europe and even China. That relative strength of the U.S. economy and demand for U.S. investments, including shares of innovative companies, may keep the dollar strong in 2025. Gold is near all-time highs following the dollar’s rally. The current price of gold partly reflects the perceived safety of hard assets amid global conflicts, such as Ukraine and the Middle East. The prospect of additional rate cuts from the Federal Reserve also helps gold, as lower rates reduce the risk of a global economic downturn and therefore a potential decline in gold purchased for jewelry. Looking ahead, our forecast trading range for gold in 2025 is $2,800 to $2,300, and our average forecast for the year is $2,600, versus an average of $2,450 in 2024. Oil prices may be going in the other direction. The most important factor in the price of oil is the supply and demand equation, which appears to favor supply over the next two years. Our forecast average price for West Texas Intermediate crude oil in 2025 is $75 per barrel, below the 2024 average of $78 and recent highs of around $120 in 2022. Forecast Four: The Yield Curve The yield curve, as we had anticipated, returned to its usual upward slope in 2024 after having inverted for several quarters in 2022-2023. At the short end of the curve, the Federal Reserve has replenished its interest rate toolkit and has made progress in reducing its balance sheet. As inflationary trends have calmed, the central bank has already begun to reduce short-term rates, and we expect further cuts in the first half of 2025. At the long end of the curve, aggressive public spending was renewed during the campaign 2024 presidential election. The focus is on the level of US debt relative to GDP. The current rate has increased by 120%. That is not an immediate problem, as the US dollar remains at high levels, signaling to global investors that the United States remains the leading economy. But deficit spending could well set a floor for long-term rates in 2025. Our current forecast range for the benchmark 10-year Treasury bond is 3.75-4.75%. Therefore, we anticipate the yield curve to steepen somewhat further in 2025. Fifth Forecast: Earnings and Valuations Corporate earnings grew at a solid single-digit pace in 2024, having recovered from an earnings downturn in 2022-2023. For 2025, we recently raised our S&P 500 earnings forecast from continuing operations to $276, from $265. Our revised forecast models full-year EPS growth of around 12%. Our greater optimism towards 2025 reflects better expected performance for three sectors that were negative in 3Q24: Energy, Materials and Industrial. We expect the energy sector’s annual earnings decline to moderate in 4Q24 and 1Q25 before turning modestly positive in the second or third quarter. Materials and Industrials could move to positive comparisons more quickly, possibly as soon as 4Q24 (Materials) and 1Q25 (Industrials). The largest EPS growth in 3Q24 came from communication services. Another sector that is expected to grow considerably next year is information technology. Utilities growth is expected to moderate but remain above the long-term average. Other sectors projected to grow above their long-term averages in 2025 include financials, healthcare, consumer discretionary and consumer staples. Meanwhile, stock valuations, according to our Stock & Bond Barometer, have improved throughout 2024 (despite the rally in stocks). At points in 2023, our barometer indicated that stock prices were more than one standard deviation above normal, due to slowing earnings growth as well as high inflation and interest rates. However, currently rates have fallen and earnings have improved, so the barometer indicates that the stock is below its fair value. Based on more traditional valuation measures, the current Forward P/E ratio for the S&P 500 is about 21, within the normal range of 15-24. The two-year forward P/E based on our estimates and the current price level of the S&P 500 is within 4%-7% of the five-year trailing P/E for the S&P 500. The EPS yield of 4.1 % minus real 10 The one-year Treasury yield (remember, the real yield is the nominal yield minus inflation) is higher than average, but not at a level that indicates overvaluation. The ratio of the price of the S&P 500 to an ounce of gold is now 2.3, within the historical range of 1 to 3. We expect equity valuation multiples to widen modestly in 2025, as rates continue going down, which will help stock market returns. Forecast Six: Segments and Sectors In terms of market segments, we expect growth to pace in 2024 as interest rates decline and EPS growth recovers. We expect US stocks to continue outperforming 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 an overweight in large-caps due to the segment’s superior growth prospects (particularly outside the IT sector) and strength financial. Our model for sector ratings takes into account sector earnings momentum, price action, valuations and analyst conviction, among other factors. According to the model, which we run quarterly, our current overweight sectors are Communication Services.