The bull 🐂 view for 2025
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[This is the first text in the 2025 market overview series. The next one, to be published next Saturday, will deliver the bear case. The final one, to be published Dec 20, will deliver our view.]
As we indicated last week, 2024 was incredibly good for equities. One of the best ever performances for the S&P500 and for the broader equity market. And a clear sign of a strong bull cycle, driven by the success of the soft landing narrative - a year in which inflation went down sustainably, unemployment did not shoot up, and GDP growth was strong, consistently around 2 to 3%.
That being said, it is unlikely that 2025 will mimic that level of performance for the broader market. However, given that this is a bullish view, we will assume that it can! As usual, I will refrain from personal biases as much as I can, and leave those for the final text of the series.
The consensus view: very bullish
The Street is very bullish itself. The consensus view (BofA, Morgan Stanley, Goldman, UBS, etc.) is around 6,500-6,600 (a modest 7-8% upside). The most bullish view (from Wells Fargo and DeutcheBank) is 7000 (~15% upside, which is still, btw, only half of this year’s result). Coming into this year, all of them were much more conservative, so this bias to the upside is interesting. But if SPX pulls off another 20-30% year, we can easily go to 7,500 or more.
What is the basis for the bull view?
Two things are expected to be the main drivers:
Trump administration reforms (tax cuts, deregulation, cutting government waste and inefficiency) are expected to be very supportive for the economy, which will push company earnings up by 7-12%. Deregulation and cutting government administration (hint: DOGE) is expected to benefit SMEs the most, while the appointment of Bessent as the Treasury Secretary is looked upon favorably in both Wall Street and Silicon Valley. Easy money is expected from Bessent, which will boost domestic lending but also M&A deals and the PE industry, and - hopefully - bring back 1980s style Reganomics. Even tariffs are of little concern in this bullish view as they are designed to protect US jobs and businesses, even if they come at the expense of lower real wages and an uptick in inflation. But overall, the bulls say, the positive impacts of tax and spending cuts should offset any negative impact from tariffs.
The Fed cutting cycle. The major reason for last year’s optimism coming into 2024 were the Nov 2023 and Dec 2023 FOMC meetings where the Fed delivered expectations of 3 rate cuts before the end of 2024, while the market started pricing in 6 cuts and went on a bullish spree. Oddly enough we waited for three quarters for the Fed to start cutting, and - surprise, surprise - it will end up with only 3 cuts. As projected. For next year, the cuts will continue, and this should add positive momentum for the markets year-round.
Because of this - a combination of declining interest rates and Trump tax cuts and pro-business regulation - we are expected to see a continuation of strong GDP growth and resilient labor markets. Labor market demand could be further bolstered by deportation of illegal immigrants, as demand for their jobs will grow as should nominal wages in those jobs. As is usual, these things will support each other: higher earnings <=> higher GDP growth <=> rising equity premiums.
In other words, 2025 will be the year where we get our soft landing: inflation and interest rates back down to 2-3%, without triggering a recession.
There are also some concerns and headwinds to the bullish arguments (most of which will be covered next time), but these are easily dismissed in the following order:
Trump’s tariffs will reignite inflation. The counterargument is that he won’t insist on these and is only using them as a bargaining chip. Therefore, there will be no trade wars and inflation will continue to go down steadily.
An overheating economy will reignite inflation even without tariffs. This is where the Fed plays a crucial role, in tandem with the new Treasury Secretary Scott Bessent. Markets have reacted really well to his appointment, with the bond market being the most welcoming (thus alleviating some concerns from Trump’s appointment; the 10Y went from 4.5 back down to 4.1).
Market concentration is too high, the SPX’s performance this year is a reflection of 7 stocks, rather than the market as a whole. The bulls say: true, but is there any reason as to why these companies won’t keep delivering the same good results, especially with the boost they are about to get from the new administration? Trump’s first term was good for tech, the second one will be too. But even if we do get a broadening of the market, Trump is also expected to be good for small caps (hint: watch Russell2000, IWM).
All of this has already been priced in, there is hardly any upside left. The bulls will say to this: markets were also pricing in the same thing back in November and December of 2023. It pushed the SPX into fresh all time-highs at the end of 2023, and yet in 2024 we got 20 more new all-time highs! Long may it continue!
We’ll leave the bearish arguments for next time. Today we will focus on the prevailing bullish narratives: the Fed cutting cycle, the potential positive impact of the Trump administration, and the state of the economy coming into 2025.