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, equity markets, segments, sectors, and finally stocks Here are our eight fundamental forecasts for 2025. Forecast One: The U.S. Economy We expect the U.S. economy to continue expanding in 2024, remaining on a growth path that is supported by three factors: an employed consumer, solid corporate investment, and above-trend government spending. For the past two years, with short-term interest rates at cycle-high levels, we argued that the economy was only a wrong turn or two away from a recession. U.S. GDP looks healthier now. By our reckoning, the U.S. economy will have grown at a 2.6% pace in 2024, down slightly from the 2.9% rate in 2023 but still above the estimated long-term trend growth rate of 2.0%. The key in 2025, as usual, will be consumer spending, which accounts for approximately two-thirds of overall GDP. At this juncture, the consumer is bolstered by low unemployment (4.2%), record-high stock prices, and rising home prices. A downturn among any of these three could lead to a slowdown. We will be watching unemployment claims closely this year. The recent trend is a benign 200,000 per week. If that data point rises above 300k, the unemployment rate could be pushing toward 5.0%. That’s when the recession fears will return to Wall Street. Currently, our estimate for GDP growth in 2025 is 1.8%, compared to 2.0% in 2023. Our preliminary forecast for 2026 is also close to that long-run average rate. Forecast Two: Inflation Inflation trends were more important than GDP trends for the stock market in 2022-2023, but their impact faded a bit, as expected, in 2024. That is because the Fed has remained ahead of the inflation curve, having raised the federal funds rate from 0.0% in early 2022 to 5.25%-5.50% by year-end 2023, while the core PCE Inflation Index has declined from 5.5% in March 2022 to the latest reading of 2.8%. Indeed, the Fed has now started cutting interest rates in order to reduce the FF/PCE gap from the current relatively wide level of 180 basis points (bps). We expect core inflation to edge slowly toward 2.0% in 2025. While producer prices far up the pipeline are actually falling, sticky prices such as shelter and transportation remain high. Wage growth has declined lately to around 4% year over year. We think the Fed, having cut 100 basis points from fed funds rate in 2024, will reduce its target rate for overnight lending by another 75 basis points in 1H25. Forecast Three: The Dollar/Gold/Oil We look for the dollar to remain at lofty levels in 2025. The U.S. Dollar Index (DXY) rose approximately 4% in 2024, rallying this fall with higher Treasury rates and President-elect Trump’s pro-growth platform. The current greenback valuation level is about 20% above the average over the past 20 years, as the U.S. 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 firm in 2025. Gold is near all-time highs in the wake of the dollar rally. The current price of gold reflects in part the perceived safety of hard assets amid global conflicts, such as Ukraine and the Mideast. The outlook for additional Federal Reserve rate cuts also helps gold, as lower rates reduce the risk for a global economic recession and thus a potential decline in gold purchased for jewelry. Looking ahead, our forecast trading range for gold in 2025 is $2,800-$2,300, and our average forecast for the year is $2,600, up from an average of $2,450 in 2024. Oil prices may be headed the other direction. The most-important factor with the price of oil is the supply-and-demand equation, which looks to favor supply over the next two years. Our forecast average price for West Texas Intermediate crude oil in 2025 is $75 per barrel, down from the 2024 average of $78 and the recent highs around $120 in 2022. Forecast Four: The Yield Curve The yield curve, as we had anticipated, returned to its normal upward slope in 2024 after having been inverted for several quarters in 2022-2023. At the short end of the curve, the Fed has replenished its tool kit on interest rates and has made progress on reducing its balance sheet. Because inflation trends have calmed, the central bank already has started to lower short-term rates, and we expect further cuts in the first half of 2025. At the long end of the curve, aggressive government spending during the 2024 presidential-election campaign renewed the focus on the level of U.S. debt to GDP. The current rate is a swollen 120%. That’s not an immediate problem, as the U.S. dollar remains at high levels, signaling to global investors that America remains the leading economy. But deficit spending may well establish a floor on long-term rates in 2025. Our current forecast range for the benchmark 10-year Treasury bond is 3.75-4.75%. Thus, we anticipate the yield curve will steepen somewhat further in 2025. Forecast Five: Earnings & Valuations Corporate profits grew at a solid high-single-digit pace in 2024, having recovered from an earnings recession in 2022-2023. For 2025, we recently raised our forecast for S&P 500 earnings from continuing operations to $276, from $265. Our revised forecast models full-year EPS growth of about 12%. Our increased optimism toward 2025 reflects expected better performance for three sectors that were negative in 3Q24: Energy, Materials, and Industrials. We expect the Energy sector’s annual earnings decline to moderate in 4Q24 and 1Q25 before swinging to a modest positive in the second or third quarter. Materials and Industrials could swing to positive comparisons more quickly, possibly as soon as 4Q24 (Materials) and 1Q25 (Industrials). The strongest EPS growth in 3Q24 came from Communication Services. Another sector that is forecast to growth sharply next year is Information Technology. Utilities growth is forecast to moderate, but remain above the long-term average. Other sectors forecast to grow EPS above their long-term averages in 2025 include Financial, Healthcare, Consumer Discretionary, and Consumer Staples. Meanwhile, equity valuations, according to our Stock/Bond Barometer, have improved during 2024 (despite the rally in stocks). At times in 2023, our barometer was signaling that stock prices were more than one standard deviation above normal, due to slowing earnings growth as well as high inflation and interest rates. Currently, however, rates have come down and earnings have improved, so the barometer is indicating that stocks are below fair value. On more traditional valuation measures, the current forward P/E ratio for the S&P 500 is approximately 21, within the normal range of 15-24. The two-year forward P/E based on our estimates and the current S&P 500 price level is within 4%-7% of the trailing five-year P/E for the S&P 500. The EPS yield of 4.1% minus the real 10-year Treasury bond yield (remember, real yield is nominal yield minus inflation) is richer than average, but not at a level signaling overvaluation. The ratio of the S&P 500 price to an ounce of gold is now 2.3, within the historical range of 1 to 3. We look for stock valuation multiples to widen modestly in 2025, as rates continue to head lower, aiding equity market returns. Forecast Six: Segments & Sectors In terms of market segments, we look for growth to set the pace in 2024 as interest rates decline and EPS growth picks up. We expect U.S. stocks to continue outperforming global stocks, based on risk profiles and growth outlooks, tempered by valuation. Small-cap stocks also offer relatively low valuations compared to large-caps, but we recommend an over-weight on large-caps due to the segment’s superior growth prospects (particularly out of the Information Technology sector) and financial strength. Our model for sector ratings takes into account sector earnings momentum, price action, valuations, and analyst conviction, among other factors. Based on the model, which we run quarterly, our current Over-Weight sectors are Communication Services