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 tensions in the Middle East have increased volatility in global markets. Investors are feeling confused while the upcoming US elections make things even more complex.

These are some of the main concerns for investors in the coming 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 could a potential escalation of the conflict in the Middle East be for the global economy?

☑ Can the war in 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
• Expecting relatively high interest rates from the FED 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
• Lower 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 the war in Ukraine
• More money for social healthcare
• Short-term volatility in the global markets due to uncertainties regarding regulations and tax policies

📌 Note:

History shows that, in the long run, economic and inflation trends have a greater impact on stock market returns than U.S. election outcomes.

 

 

 

Forecasting Interest Rates for 2024-2025

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

□ In the United States

According to the FEDWatch tool, the FED is expected to make a significant rate cut, lowering rates to 4.25–4.50% in December 2024 from the current 5.25–5.50%. Further rate cuts are already anticipated in 2025.

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

This may seem very bullish for equities, but historically, when the FED starts cutting rates after a long period, stocks often decline. This is because the start of a rate-cutting cycle usually signals a weakening 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 chart below, we see the weekly S&P 500 alongside the RSI Precision indicator. From a technical analysis perspective, the S&P 500 is forming higher highs, which is bullish. However, the overall bullish trend appears overextended, suggesting there may be room for a 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 S&P 500 Chart

The higher highs on the chart maintain bullish momentum for the S&P 500. However, the overextension of the bullish structure suggests there may be room for a correction—note that this refers to a correction, not a trend reversal at this point.

☑ Strong support levels are expected at 4,765 points, 4,500 points, and 4,190 points.

☑ RSI Precision is currently neither overbought nor oversold.

☑ The slope of RSI Precision is slightly descending while the price chart is rising, indicating a potential RSI divergence.

☑ There is a bearish MACD signal on the weekly timeframe (shown by a red dot at the bottom of the RSI Precision).

☑ On the monthly timeframe, which is more significant, no bearish MACD signal is present.

 

 

Conclusions

From a static fundamental perspective, equities are not very expensive. However, many economic and political risks are not yet reflected in prices. Geopolitical tensions, particularly in the Middle East, could affect energy prices, global trade, and consumer confidence.

In recent years, corporate earnings growth has been driven by inflation. As inflation normalizes in 2025, corporate earnings may be negatively affected. The upcoming U.S. elections add further uncertainty:

• If the Democrats win, global markets could face short-term volatility due to uncertainties over bank regulations and potential new corporate tax policies.

• If Trump wins, uncertainty would arise over the impact of tariffs on inflation, global growth, and international trade.

At this stage, a prudent approach may be to keep a significant portion of the portfolio in cash and Treasury Bills.

 

■ 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