The Equity Markets in 2024-2025

In the past couple of months, there have been changes in the economic and geopolitical landscape. Rising unemployment and the escalation in the Middle East created volatility in the global markets. Investors are feeling confused while the upcoming US elections make things even more complex.

These are some of the key concerns for investors for the upcoming months and years:

• What are the probabilities for slower economic growth or even a mini-recession in 2025?
• Will the upcoming FED/ECB rate cuts be enough to deal with this challenging economic environment?
• How dangerous can prove for the global economy a potential escalation of the conflict in the Middle East?
• Can the war on Ukraine end in 2025?
• Which candidate for the US presidency will be best for the economy and the stock market?
• What happens to the corporate tax rate if Democrats win?
• What will be the impact on global commerce and inflation if Trump wins and applies a 10% tax on imports?

Let’s start with the global economic outlook before moving forward with the impact of the US elections.

 

The Global Economic Outlook for 2024-2025 (OECD)

According to the latest OECD Economic Outlook (*), the global economy is continuing to grow at a modest pace. OECD projects a 3.1% GDP growth in 2024 and a 3.2% in 2025. Inflation continues to decline while there is an improvement in the private sector’s confidence. There is growth for the US and emerging economies. However, the economic outlook is not as good for some advanced European economies.

• The US economy is expected to grow 2.6% in 2024 and 1.8% in 2025
• Key emerging economies are growing faster (India 6.6% and China 4.9% in 2024, and almost the same growth rates for 2025)
• Key European economies look weaker (Germany 0.2% growth in 2024 and 1,1% in 2025 – France 0.7% in 2024 and 1.3% in 2025)
• In the Euro area, the GDP growth is projected at 0.7% in 2024 and 1.5% in 2025
• The Japanese GDP is projected to grow by 0.5% in 2024 and 1.1% in 2025

(*) Note that the above OECD forecasts were made in May 2024.

 

 

The Impact of US Elections

As economic growth is expected to decline in 2025, the next US president will attempt to boost the economy by applying a different mix of tax incentives and government spending.

□ If Republicans Win

• Keeping the corporate tax rate at 21%, however, there are concerns about the federal budget deficit
• Extension of the provisions of the “Tax Cut & Jobs Act” that expire in late 2025
• More tariffs on selected categories of imported goods (Trump proposed a 10% tariff increase on imports and 60% on Chinese goods)
• Higher inflation as a result of imposing tariffs
• Maintaining high interest rates as long as possible to deal with inflation
• A strong US dollar as a result
• A push for fossil fuels, and less money for renewable energy
• Crypto-friendly policies
• Trying to end the war in Ukraine
• Less-volatility in the global markets

□ If Democrats Win

• Most of the provisions of the “Tax Cut & Jobs Act” expire in late 2025. If these provisions are not extended, corporate tax in the US could move to 35% from 21% today
• Most likely keeping tax breaks only for those earning $400,000 or less
• ​Banks could face increased regulatory scrutiny
• Further development of renewable energy
• No additional tariffs on imports
• More money for Ukraine
• More money for social healthcare
• Short-term volatility in the global markets due to uncertainties regarding regulations and tax policies

Note:

In the long run, history has shown that economic and inflation trends are more significant for the stock market returns than the US election outcomes.

 

 

 

Forecasting Interest Rates for 2024-2025

Both FED and ECB are expected to cut interest rates in 2024 and 2025.

□ In the United States

According to the FEDWatch tool, FED is expected to decisively cut rates. That means moving to a 4.25-4.50% rate in December 2024 from the current 5.25-5.50% rate. In 2025, more rate cuts are already priced in.

• 4.25-4.50% in December 2024
• 3.25-3.50% in September 2025

This may look very bullish for equities, but keep in mind that historically when the FED begins to cut rates after a long time, stocks usually decline. This can be explained as the beginning of a rate-cutting period is an indicator of a weaker economy.

□  In the Eurozone

ECB is expected to make more rate cuts in 2024 as well.

• Currently, 4.25%, 4.50%, and 3.75% interest rates on refinancing operations, marginal lending facility, and the deposit facility respectively.
• One or two more rate cuts in 2024, corresponding to a year-end rate of 3.25-3.50% in the deposit facility

 

Major American Markets P/Es for 2024-2025

According to Barons (sources), these are the trailing 12-month P/Es for the American markets:

• Dow Jones {24.38 trailing P/E and 2.17% dividend yield}
• S&P 500 {23.15 trailing P/E and 1.38% dividend yield}
• Nasdaq-100 {29.65 trailing P/E and 0.85% dividend yield}
• Russel 2000 {31.05 trailing P/E and 1.50% dividend yield}

If we assess the above trailing 12-month P/E ratios from a historical perspective, we may conclude that the American equity markets are not very expensive. However, what matters the most is how effectively the US private sector will be able to cope with a potential decline in economic growth in 2025.

 

The Chart of the S&P 500

In the following chart, we can see the weekly S&P 500 along with the indicator RSI Precision. From a technical analysis perspective, the S&P 500 is creating higher-highs on the chart, which is bullish, however, we can also see an overextension of the general bullish structure which means there is some room for correction.

• On the left, you can see the weekly, monthly, and yearly returns of the S&P 500
• On the bottom, there is RSI Precision 3 (with MACD signals) » More about TradingCenter's RSI Precision
• The horizontal lines on the price chart indicate some important support levels

Chart: Weekly S&P500 with major support levels

Short-Analysis of the above S&P 500 Chart

• The formation of higher-highs on the chart maintains a bullish momentum for the S&P 500.
• However, the overextension of the general bullish structure indicates some room for correction. Note that we are referring to a correction, not to a trend reversal at this point.
• Strong support is expected at 4,765 points, 4,500 points, and after at 4,190 points.
• RSI Precision is neither overbought nor oversold.
• The slope of RSI Precision is slightly descending while the price chart is ascending, which means the formation of a potential RSI divergence.
• Finally, there is a bearish MACD signal on the weekly timeframe {it is indicated by a red dot on the bottom of the RSI Precision}.
• However, on the monthly timeframe, which matters the most, there is no bearish MACD signal.

 

 

Conclusions

From a static fundamental perspective, equities are not very expensive. However, many risks in the economic and political environment are not yet priced in. There are a lot of risks in the geopolitical landscape, especially in the Middle East, that could impact energy prices, the conduct of global commerce, and consumer confidence.

Moreover, in the past couple of years, the growth of corporate earnings has been inflation-driven. The normalization of inflation in 2025 will probably hurt corporate earnings. The upcoming US elections make this environment even more tricky:

• If Democrats win, global markets will face short-term volatility due to uncertainties regarding bank regulations and a new corporate tax policy.
• If Trump wins, there will be uncertainty regarding the impact of the imposed tariffs on (i) inflation, (ii) global growth, and (iii) the conduct of global trade.

Maybe, the wisest thing at the moment is keeping a significant percentage of our portfolio in cash and bonds.

 

■ The Stock Market in 2024-2025

Giorgos Protonotarios, Financial Analyst

for TradingCenter.org (c), 14th of August 2024

 

Sources:

• https://www.oecd.org
• https://www.cmegroup.com
• https://www.barrons.com
• https://www.wsj.com/market-data/stocks/peyields