2024 was a great year on a number of fronts, but was certainly a banner year for stocks as shown by the index returns below:
- S&P 500: 25.0%
- Dow Jones Industrial Average: 15.0%
- NASDAQ: 29.6%
- Russell 2000: 11.5%
- MSCE EAFE (international): 4.3%
- Emerging Markets: 8.1%
Many would expect bonds to also perform well with the Federal Reserve cutting interest rates. However, the aggregate bond index only gained 1.3% last year. Yes, the Fed cut rates by 1% last year and will likely continue cutting in 2025, but the Fed only controls ultra-short rates. Longer-term rates are impacted much more by the underlying fundamentals of the economy. The chart below shows the significant change in the Treasury yield curve. We’re now in a more normal environment where long-term bonds are paying more interest than short-term bonds.
As we turn the page to 2025, economists from around the world are releasing their forecasts and predictions for the new year. These vary significantly, but we thought Goldman Sachs 10 for 2025 touch on the main points fairly well.
Goldman Sachs 10 for 2025
1. Growth: We continue to see limited recession risk and expect several tailwinds to global growth, including strong real household income growth, a smaller drag from monetary/fiscal tightening, a recovery in manufacturing activity, and an increased willingness of central banks to deliver insurance cuts, if needed.
2. Post-Election policy: While we expect US policy changes next year, we think they are unlikely to substantially alter the trajectory of the US economy or monetary policy. In the US, the Trump administration has pledged new tariffs on China and autos, reduced net immigration, modest new tax cuts, and a more relaxed regulatory stance.
3. Inflation: While we expect US policy changes next year, we think they are unlikely to substantially alter the trajectory of the US economy or monetary policy. In the US, the Trump administration has pledged new tariffs on China and autos, reduced net immigration, modest new tax cuts, and a more relaxed regulatory stance.
4. Monetary Policy: The previous experience with US tariffs in 2019 suggests that if inflation expectations remain well anchored, the Federal Reserve (Fed) would try to ‘see through’ tariff-driven inflation. We expect the Fed to deliver quarterly rate cuts through 3Q 2025, reaching a terminal rate of 3.5-3.75%. Globally, we expect cuts from all G10 central banks except the BoJ in 2025.
5. Developed Market Equities: Goldman Sachs Global Investment Research (GIR) forecasts the S&P 500 will rise to 6500 by year-end 2025, predicated on continued US economic expansion, earnings growth of 11%, and a year-end next twelve months P/E multiple of 21.5x. Globally, we expect moderating returns, governed by earnings growth and dividends. We prefer geographic diversification, equal-weight S&P 500, small/mid caps, artificial intelligence(AI)-enabled revenue exposure, and lower volatility call-writing strategies.
6. Emerging Market Equities: A stronger dollar, higher tariffs on China and autos, and shallower easing cycles across EM provide a more challenging backdrop. We think emerging markets with 1) strong domestic micro fundamentals, 2) insulation from external risks such as tariffs, and 3) supportive local policy are well-positioned to outperform in 2025.
7. Rates: In the US, we expect longer-term yields to remain at around current levels, reflecting ongoing pressure from persistently elevated deficits. We think a steepening bias best suits a scenario where the Fed is more focused on growth than inflation risks. Outside the US, the growth downside case for owning duration is most pronounced in Europe.
8. Credit: Investors will likely start 2025 with tight spread constraints, though we expect these levels to persist. We see risks migrating from systemic concerns within the banking system to broader trade war and US debt sustainability concerns.
9. Currencies: We had expected the US Dollar to gradually decline as global growth moved into better balance. However, Dollar challengers still struggle to mount a better case. We now expect tariffs may feature prominently in US policy, along with some further fiscal changes. This backdrop poses a potent combination for Dollar resiliency in 2025.
10. Commodities: The wide range of potential US policy shifts may strengthen the role of commodities. Gold and oil positions, in particular, may act as inflation and geopolitical hedges in scenarios such as tariff escalation, supply disruptions, conflict escalation, and debt sustainability.
With all these forecasts in mind, we remind our readers to not bet the farm on these taking place by 12/31/2025. Last year, not a single main Wall Street firm came close to predicting the S&P 500’s 25% return. They were all too low. The stock market, economy, geopolitics and college football for that matter are all difficult to forecast. None of the conference champions are still in the College Football Playoff, but we sure hope the Buckeyes can continue their run!
Rather than attempting to make bold predictions and significantly shifting portfolios hoping they come true, we’d rather stick to the tried-and-true principles of diversification and rebalancing. We wish all of you and your families a great 2025!
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