The latest bullish reading is now below the historical average while bearish sentiment has crept up above the historical average. An investor watches a board showing stock information at a brokerage office in Beijing on Oct. 8, 2018.Jason Lee/Reuters
The more investors worry about 2025, the better the year looks for stocks.
At first glance, it might appear odd to mention concerns about the market when so much of the discussion about the year ahead points to a continuation of 2023 and 2024. That is, bull-market euphoria.
According to FactSet, stock price forecasts from equity analysts imply that the S&P 500 will notch another double-digit gain in 2025 – the index’s third in three years. Based on average target prices for individual stocks, analysts expect the index will close at 6,721 by the end of the year, up about 14 per cent.
Ed Yardeni, chief investment strategist at Yardeni Research, is even more bullish than analysts and most of his Wall Street peers.
He believes the S&P 500 will rally to 7,000, for a 19-per-cent gain in 2025, driven by a combination of subdued inflation, solid U.S. economic activity and record-high profit margins fuelled by corporate tax cuts.
“We are expecting that earnings growth will account for all of next year’s gain in the S&P 500, with a slight decline in the forward price-to-earnings ratio,” Mr. Yardeni said in a December note, meaning that stock valuations can fall even as prices rise, thanks to surging profits.
According to Savita Subramanian, equity and quant strategist at Bank of America, fund managers are also feeling good about stocks following a strong rotation from cash to equities in December.
If an upbeat stock market outlook strikes you as a key reason to feel skeptical about 2025, especially after the S&P 500 gained 23 per cent in 2024 and 24 per cent in 2023, here’s the good news: You’re not alone.
You don’t need to look far to find evidence of lingering doubts about stocks.
The most recent weekly sentiment survey from the American Association of Individual Investors, which polls members on their stock market outlook for the six months, marked the fourth straight decline in bullishness.
For the week ended Jan. 1, just 35.4 per cent of the retail investors that comprise AAII members felt bullish. That’s down from 43.3 per cent who felt the same way three weeks ago and well below a recent high of 52.7 per cent in July.
The latest bullish reading is now below the historical average. At the same time, bearish sentiment – the percentage of respondents who believe stock prices will decline over the next six months – has crept up above the historical average.
This suggests that small investors are harbouring some skepticism right now. It could imply that stock prices are not yet reflecting the sort of unanimity that can point to a dangerously frothy market, which is a good thing because it means stocks are not priced to perfection.
The U.S. political backdrop is another source of concern, and opportunity.
Sure, many observers expect that U.S. president-elect Donald Trump will usher in policies that can stimulate the country’s economic activity after he moves into the White House later this month.
Tax cuts and looser regulations are among the key changes he is expected to make while the stock market offers a reflection of his success – a reading he is not likely to ignore.
But all the fist-bumping is being offset by uncertainties related to trade.
Mr. Trump is threatening tariffs not only against rivals such as China, but also allies such as Canada and Mexico, which could raise prices and drive inflation higher. Complex trade networks, such as those that underpin the automotive sector, are now in jeopardy, threatening to introduce grit into smoothly operating systems.
Are these concerns weighing on stocks? Perhaps. But if the trade threats subside – which is a reasonable “if” – the relief could underpin market gains.
Lastly, monetary policy isn’t the stock market tailwind it was supposed to be.
The Federal Reserve is sounding increasingly cautious about cutting interest rates, as economic activity remains strong and threats of inflation persist, confounding expectations for aggressive rate-cutting through 2025.
As a result, borrowing costs are still high and bonds continue to offer an attractive alternative to stocks. The S&P 500 has declined 3.4 per cent since the Fed delivered its last outlook, in mid-December.
Monetary policy may have become a headwind for the stock market over the past couple of weeks. The retreat might also be a warning sign that two years of solid gains have pushed equity valuations to the limit. There’s so much to worry about – which could provide the fuel for the next rally.