Summary

Eight Fundamental Forecasts for 2025 Argus Research Company follows a top-down investment framework, starting with the national 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 1: The US Economy We expect the US economy to continue to expand in 2024, staying on a growth path supported by three factors: a consumer busy, solid corporate investment and above-trend public spending. For the past two years, with short-term interest rates at cycle highs, we argued that the economy was just one or two wrongs 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 lower than the rate of 2.9% in 2023, but still above the estimated long-term growth rate of 2.0%. The key in 2025, as usual, will be consumer spending, which accounts for roughly two-thirds of global GDP. At the moment, the consumer is bolstered by low unemployment (4.2%), record stock prices and rising house prices. A drop in any of these three could lead to a slowdown. We will be watching jobless claims closely this year. The recent trend is 200,000 per week. If this data point goes above 300,000, the unemployment rate could be pushing towards 5.0%. That’s when recession fears will return to Wall Street. Our current estimate for GDP growth in 2025 is 1.8%, compared to 2.0% in 2023. Our preliminary forecast for 2026 is also close to this long-term average rate. Second forecast: 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 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 the end of 2023, while the core PCE inflation index has fallen from 5.5% in March 2022 to the latest reading of 2.8%. Indeed, the Fed has begun to cut interest rates to narrow the FF/PCE gap from the current relatively wide level of 180 basis points (bp). We expect core inflation to slowly ease towards 2.0% in 2025. While producer prices at the very top of the portfolio are falling, sticky prices such as housing and transport remain high. Wage growth has recently slowed to around 4% year-on-year. We believe the Fed, after cutting the fed funds rate by 100 basis points in 2024, will cut its overnight target rate by another 75 basis points in 1H25. Third Forecast: Dollar/Gold/Oil We expect the dollar to remain at elevated levels in 2025. The US dollar index (DXY) rose about 4% in 2024, recovering this decline with the highest rates in Treasury and the proportion of President-elect Trump. growth platform. The greenback’s current level of 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 the china This relative strength of the US economy and demand for US investments, including shares of innovative companies, may keep the dollar strong in 2025. Gold is near all-time highs on the back of the recovery in dollar 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 further rate cuts from the Federal Reserve is also helping gold, as lower rates reduce the risk of a global economic downturn and thus a possible decrease in gold bought for jewellery. Looking ahead, our 2025 gold trading forecast range is $2,800 to $2,300, and our average forecast for the year is $2,600, compared to an average of $2,450 in 2024. Oil prices may go in 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 recent highs around $120 in 2022. Forecast Four: The Yield Curve The yield curve, as we had predicted, returned to its normal upward slope in 2024 after being inverted for several quarters 2022-2023. At the short end of the curve, the Fed has restocked its interest rate toolkit and made progress in shrinking its balance sheet. As inflationary trends have calmed, the central bank has already started to cut short-term rates, and we expect further cuts in the first half of 2025. At the end of the curve, aggressive government spending during the campaign of the 2024 presidential elections was renewed. attention to the level of US debt to GDP. The current rate is 120%. It’s not an immediate problem, as the US dollar remains at high levels, signaling to global investors that the US remains the leading economy. But deficit spending may set a floor on long-term rates in 2025. Our current forecast range for the benchmark 10-year Treasury is 3.75-4.75%. So we expect the yield curve to steepen a bit in 2025. Forecast Five: Earnings and Valuations Corporate profits grew at a solid single-digit pace in 2024, after recovering from a 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 annual EPS growth of approximately 12%. Our higher optimism towards 2025 reflects better expected performance for three sectors that were negative in 3Q24: energy, materials and industrials. We expect Energy sector annual profits to decline to moderate in 4Q24 and 1Q25 before turning modestly positive in the second or third quarter. Materials and industrials could swing to positive comparisons more quickly, possibly as early as 4Q24 (Materials) and 1Q25 (Industrials). The strongest growth in EPS in 3Q24 comes from communication services. Another sector that is expected to grow a lot next year is information technology. Growth in utilities is expected to moderate but remain above the long-term average. Other sectors projected to grow EPS above their long-term averages through 2025 include financials, healthcare, consumer discretionary, and consumer staples. Meanwhile, equity valuations, according to our stock/bond barometer, have improved through 2024 (despite the rally in stocks). At times 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 . Currently, however, rates have fallen and profits have improved, so the barometer indicates that the stock is below fair value. In 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 P/E based on our estimates and the current price level of the S&P 500 is between 4% and 7% of the five-year P/E of the S&P 500. The EPS yield of 4 .1% less the real 10. -Treasury yields for the year (remember that the real yield is the nominal yield minus inflation) are richer than average, but not at a level that signals 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 look for equity valuation multiples to widen modestly in 2025 as the rates continue to fall, supporting stock market returns. Forecast Six: Segments and Sectors In terms of market segments, we look for growth to set the pace in 2024 as interest rates decline and EPS growth accelerates. We expect US equities to continue to outperform global equities, 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 better growth prospects (especially outside the IT sector) and the financial strength. Our industry ratings model takes into account industry earnings momentum, price action, valuations and analyst conviction, among other factors. According to the model, which we do quarterly, our current overweight sectors are communication services