Outlook: ‘good, not great’

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   By Guest Blogger Ryan Lewenza

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Despite numerous headwinds in 2024 – two raging wars, major political change across many countries, high interest rates, China’s troubled housing market and slowing economic growth – the global financial markets delivered a great year for investors.

What’s in store for 2025? Can the markets rally for a third year after two 20%+ years? Will Trump go full-out trade war, leading to a surge in inflation? Will Canada crumble under the weight of US tariffs, effectively ripping up our free trade agreement and in turn, blowing up the robust and enduring bond between our two great nations.

In today’s blog we outline the key market trends, risks and opportunities for 2025. We see another year of market gains, but we anticipate a bumpier ride as we transition into the later stages of this economic expansion and bull market.

The global economy has faced numerous challenges in recent years, but inflation has been the most pernicious. Broadly, prices are up 20% over the last 4-5 years. On the positive side, since peaking at 9% in 2022, US inflation has slowed materially, now around 2.5-3% yoy (in Canada at 2%).

Critically, this has allowed central banks to cut interest rates, and this is expected to continue in 2025. Interest rates are felt with a lag, so it may take a few quarters, but we see the potential for economic growth to pick up a bit in 2025.

The US economy remains on solid footing growing around 2.5-3% GDP. The strong labour market, lower interest rates and high net worth should support continued consumer spending. Trump’s policies, and what he passes first, could be very consequential to the US economy this year. The tariffs will be terrible so I’m hoping he dials this back focusing on his pro-growth agenda of deregulations, tax cuts, right sizing the US government and increasing energy production.

Canada’s economy has stalled out, barely growing at 1% in 2024. With our housing affordability issues, high interest rates and prices, and a weakening labour market, it’s no wonder our economy is struggling. But our economy could pick up this year in large part due to the lower interest rates.

Clearly, if Trump follows through with his threats of tariffs that this will have a devastating impact on our economy, driving it into a recession. The tariffs would lead to lower exports, business investment would be curtailed, and job losses would weigh on consumer spending. With our economy barely growing as it is, our economy would fall into recession almost overnight.

Overall, we see continued positive economic growth globally and no recession this year. The big risk/unknown is whether Trump will follow through with tariffs. This will be key in 2025!

GDP growth forecasts for 2025

Source: Bloomberg, Turner Investments

For the equity markets we see three key factors that could keep this bull market going.

First, this current bull market, which started in 2023, will be entering its third year in 2025. Since WW2, the average bull market length for the S&P 500 is 5 years. From a time perspective, were at the roughly halfway mark (maybe the seventh inning) of this current bull market and we believe there are a few more innings to playout. Analyzing past bull markets, we found that years three tend to deliver more modest gains of 6% on average. So, we’re expecting a third year of gains but we’re unlikely to see a repeat of the 20%+ returns seen over the last two years.

Average length of bull markets is 5 years

Source: Bloomberg, Turner Investments

Second, inflation is moderating, which has provided the runway for central banks around the world to cut interest rates. Lower interest rates, assuming we’re not heading into a recession, tend to be good for stock prices. On average, the S&P 500 rises 14% in the first 12 months after the Fed starts cutting rates. The Fed started this current easing cycle in September, so could we see the stock market up come the fall? History suggests so.

Third, and most importantly, corporate profits are expected to be pretty good this year. We see the US economy growing around 2.5% this year and profit margins potentially expanding, which would be positive for earnings.

Over the long-term S&P 500 earnings have grown around 7%, but we see earnings growing at a larger clip this year, potentially double digit. Currently, consensus is for S&P 500 earnings to grow 13% in 2025. This would be impressive and bullish for stock prices. We see stock market gains this year but more muted as valuations are elevated (see more below) and, as mentioned, it could be a bumpier path this year.

S&P 500 projected earnings

Source: Bloomberg, Turner Investments

Last year we avoided a 10% correction (the worst we saw was a 8.5% drop in July) so we’re probably due. As we like to remind investors and clients, the S&P 500 experiences one 10% correction, and three 5% pullbacks every year. I see a few key risks that could lead to some volatility over the year.

First, is geopolitics. Still. Will China invade Taiwan? Will there be a ceasefire in the Ukraine/Russia war? Middle east ceasefire? And Trump!! There are no shortage of geopolitical issues that could negatively weigh on the economy and markets.

Second, inflation comes back. US inflation has been stubborn around the 2.5-3% range recently and the concern is inflation could come back, especially if the orange guy proceeds with his ill informed and self-harming tariffs.

Third, US stock market valuations are getting pricey. Currently, the S&P 500 trades at 22x earnings, which as seen below, is one of the highest levels seen in years. We’re currently in the 90th percentile of historical valuations so that’s a concern. Now, the US get’s (and deserves) a growth premium, since it’s the most powerful and dynamic economy in the world, and their stocks/companies deliver higher returns on equity (ROEs). The concern here is those premiums are getting extreme. If we’re right on earnings, then stocks can continue to rise this year but we’re keeping a good eye on those valuations.

US equity valuations are elevated

Source: Bloomberg, Turner Investments

Finally, here’s a few key themes for 2025:

• We see another year of gains but more modest relative to last year. Corporate profits will be key.
  We like resources and things that hurt when you drop them on your feet. Gold looks ok with all the money printing and central bank buying. Nat gas is potentially breaking out, and oil could bounce from the recent lows. Add in the banks, which should do better on the lower interest rates. We see more upside for the TSX this year.
• The third year of bull markets, on average, yields an average return of 6% for the S&P 500. That seems reasonable to us. We particularly like US small caps, which are attractively valued and benefit from many of Trump’s policies (lower taxes, less regulations, tariffs).
• We see further rate cuts in 2025 and expect bond yields to decline a bit. Given this we see the potential for some bond price appreciation this year. And we’re finally getting decent yields so bonds are looking better than they have in years.
• Finally, REITs and dividend stocks stand to benefit from the lower rates.

Overall, we see more positives then negatives this year and therfore see another year of gains. But, investors should expect more moderate returns with higher market volatility. As we’re saying to clients, ‘we see a good year, not a great year’ for 2025.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.

Source: https://www.greaterfool.ca/2025/01/11/outlook-good-not-great/