📈  Chart of the Week 12/29/2024
By Michael Allison, CFA
This week’s Chart represents, at least metaphorically, a partial view of my overall theme and expectations for 2025.
With a hat tip to the legendary Strategist at Morgan Stanley, Byron Wien (RIP) and his famous annual Top 10 Surprises, I’m bringing back the Fearless Forecasts that I used to write back during my tenure at Eaton Vance.
Below is an abbreviated draft of my contribution to the broader 2025 Outlook piece that I and my colleagues at Investment Research Partners will be publishing for our partner RIA firms and their clients early in the new year.
Fearless Forecasts for 2025:
U.S. Equity Returns Moderate: We see a moderation of U.S. equity market returns, in particular the S&P 500 compared to 2023 and 2024, as mega-tech stocks underperform for a time to "grow into" their valuations.
Better Performance Outside the Mega-Caps: Mid-cap and higher quality small cap stocks outperform mega-cap stocks. An equal-weighted S&P 500 outperforms the market cap-weighted S&P 500.
Fixed Income Performs Poorly: Bond returns are tepid or worse, as short rates are slow to decline and long rates stay relatively high or even rise, due to either accelerating U.S. inflation or government debt related concerns. The Bloomberg Aggregate Bond Index delivers low single digit returns at best.
Inflation Returns: We see a modest but meaningful return of inflation, owing to a resurgence in global growth, labor constraints, and the impact of tariffs likely to be imposed by the incoming Trump administration. We're not likely to see a return to the 9% level of 2022, but we could potentially see a move back up to the 4-5% range.
Commodities Make a Comeback: Commodities perform well as global growth accelerates and investors seek to hedge against a resurgence of inflation.
U.S. Dollar Weakens: We see a weaker dollar as U.S. policies focus on growing exports and slowing imports and commodities trade higher.
DOGE is Real + Return of the Bond Vigilantes: The U.S. makes some meaningful progress on slowing the rate of U.S. fiscal spending, which is still pacing near pandemic levels. This progress on spending should at least somewhat offset the return of inflation and a weaker dollar.
Europe Reawakens: Stocks in developed European markets start to narrow the performance gap with U.S. stocks, as a result of a weaker dollar and stronger commodity prices. Green shoots of structural political, economic, and capital markets reform could start to appear. We can look to Argentina as a recent example of how quickly this can happen. The urge for economic freedom is contagious and sentiment in Europe couldn't be much worse.
AI Goes Nuclear: An AI-focused data center which is self-sufficient in terms of power and incorporates its own on-site, "baby" nuclear power plant will be announced. This is nuclear power re-imagined and could accelerate the rate of data center development, clean power growth, and returns on capital for AI spending.
Bitcoin Crashes Again: Bitcoin will have (another) 50+% drawdown, reminding everyone of just how volatile crypto currencies can be, and how important it is that they be appropriately sized in portfolios which own them. Bitcoin will also recover some or all of the decline.
Of course, some or all of these forecasts could turn out to be dead wrong, but laying them out in this format helps frame our current thinking and lays out a base case for the year. New information and events throughout the year could certainly present themselves and alter our views, but for now… We are fearless.
If you’re interested in receiving the 2025 Outlook, please email me.
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