It would not surprise me to see 2025 repeat the drawdowns we saw in 2022. And we could see 10-15% lower in the first half. For example, during Q4 2021 – I warned of excessive valuations (specifically in tech). That was timely. However, it’s different this time. 10-year yields are now above 4.70%. And should they continue their march towards 5.0% – valuations (and earnings) will be challenged. That said, Wall St. “experts” are assuming significant earnings growth for next year (evidenced by the average 6,600 2025 target at an expected 25x forward multiple). They’re adopting a “lottery ticket” mentality – where the majority of investors naively expect extraordinary returns with little regard for downside risks.
Interest Rates / Bonds
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Fed’s Balancing Act for 2025
2025 will not be without its challenges for both investors and central baks. For example, if we consider: monetary and fiscal policy risks; likely introduction of tariffs and price increases; geopolitical risks as global central banks navigate U.S. policy; a stronger US dollar with a rising 10-year treasury yield; ongoing debt and deficits concerns; the risk of stubborn inflation (notably services); and a weakening employment picture – this presents a complex web of related variables or risks. How are markets pricing this in? For now they remain complacent – trading at record highs – at near 22x forward earnings.
End of 20-Year Cheap Money Era
Equities were seemingly caught off balance with the Fed’s ‘surprise hawkish shift’. From mine – there was very little surprising about it – you only needed to look at the data. However, what I was more interested in was how Powell would explain why they were cutting rates. As it turns out he struggled – leading to a small sell off in stocks. The irony was Powell did a better job of explaining why rates should not be lowered (which is obviously at odds with their decision to cut).