Stifel’s Barry Bannister has a heretical notion: US equities might fall in 2025. (“We have found a witch, may we burn him?”)
What might’ve put such a wicked idea in his head? The specter of stagflation, for one thing, or maybe “stagflation-lite” is the better term.
Bannister expects GDP growth in the US to cool fairly sharply late next year to “just” 1.5%, roughly half the current pace. At the same time, he sees core inflation sticking around near 3%, an unpalatable combination which could facilitate a 10% correction in richly-priced US shares.
The figure below tells you quite a bit about Bannister’s assessment of current valuations. Suffice to say he thinks we’re witnessing a bubble.
“Even within its multi-century uptrend, the S&P 500 P/E is overextended, which may point to imminent correction,” Bannister wrote.
I don’t necessarily disagree, but I’d offer the usual word of caution. Timing the market based on allegedly “unsustainable” valuation extremes is a fool’s errand. In fact, it’s immortalized in one of the most oft-cited market adages: Irrationality can persist for longer than many skeptics can remain solvent, assuming they’ve put their money where their naysaying mouth is.
To be sure, Bannister’s not predicting a crash. Rather, he expects the above-mentioned growth slowdown to catalyze a correction for the S&P into the “middle-5,000s,” not a disaster by any stretch, but enough to cause plenty of overwrought hyperventilating if it were to play out.
The figures above, also from Bannister, suggest some scope for an honest-to-God bear market in the event past is precedent, or perhaps I should say in the event his analogues are in fact analogous.
I’m skeptical myself of attempts to discern “historically similar periods,” and even in cases where the comparison might make some measure of sense, I’m wary of using analogues for forecasting purposes. If you trade based on a “history doesn’t repeat, but it often rhymes” strategy, your results are likely to be mixed, at best.
None of that’s to take anything away from Bannister’s piece which, frankly, is a breath of fresh air amid a suffocatingly milquetoast Wall Street consensus. His latest is lively and his charts are… well, colorful, let’s call them. Time was, I would’ve trumpeted highlights from this sort of analysis from the proverbial rooftops.
The problem, as I noted earlier while discussing Barry’s piece with an acquaintance, is just that for anyone who might be inclined to trade it, it’s a whole helluva lot of trouble to go through to “save” 10%.
Let’s say he’s exactly right and you manage to trade it perfectly. That’d mean you capture whatever upside’s left to new records in H1 2025, then you spare yourself a 10% pullback in H2, then you buy that pullback and ride the index back up as it reclaims the H1 ATHs. Setting aside how unlikely it is that you’ll execute flawlessly, and forgetting that Bannister might simply be wrong, would it be worth the effort and stress for the average market participant versus just staying invested? (I know how Charlie Munger would answer that question.)
As for the Fed, Stifel expects two more cuts and done “due to sticky inflation and zero fiscal visibility.” The risk, though, is that an “inflation-leery” Committee is then reluctant to restart cuts late next year, as growth slows. That, Bannister went on, “puts the greatest risk around mid-2025 from an economic and policy standpoint.”
Oh, and then there’s Trump to ponder. “In the span of US history, there have been few Great Disruptors like the incoming Administration, which may have two years to cement its agenda, adding headline risk to 1H25,” Bannister said, warning that “the environment does not appear conducive to continued equity mania.”
(“How do you known he is a witch?” “He looks like one!”)
I am a BEAR. I can’t imagine not being one starting on January 20, 2025. Almost everything Trump is PROUDLY saying hw will do are highly correlated with negative outcomes. I am a retired founder of a fund that made money in 28 out of 31 years on assets that peaked at $14.3 billion with a mean return in the low teens over those three decades. You can look it up. My first killing was for a bank in 1973 when every Wall Street firm saw the market up – that is what Barron’s reported. And Nixon was a saint compared to Trump although Bebe Rebozo was scraping the bottom of the barrel.
“Only” 28 of 31 years? Damn, that was quite a rare achievement, sir. Nicely done!
Luck too. After 2011 when I stepped aside global macro under-performed – even if you were God – as the U.S, ruled the heavens. With Trump in charge global macro is back in the sun. My bones might be old but they feel good again. Sorry ‘H’, timing is critical.
I think it depends on why the market breaks down. If it is simply a stock market “mania” passing, with the real economy stable, then perhaps the result is merely a correction. If the real economy is dislocated, that plus popped mania can combine for a real bear market.
What could dislocate the real economy? Trade war, labor shrinkage, inflation resurgent, deficits higher, and that’s assuming the adults remain in charge in DC – all two of them, by my count.
In 2022 we had a bear market. Can you imagine more economic dislocation in 2025 than in 2022? I can.
There are a number of growing weaknesses building up. Somehow, on youtube, my algo generated feed is yielding a lot of real estate people in Florida up to Tennessee getting very nervous for what 2025 will deal out to them, as the aftermath of the hurricanes, lack of rebuilding funds, the neutral rate question and property insurance premiums doubling or unavailable. As we know, timing a crash is more about luck, and knowing what the catalyst will be ahead of time is what post facto movies convert lucky investors into memorable characters.
Just a brief comment about the market’s political sensibility, or lack of it. The balance between consumption and production or between capital and labor are very important and both have changed several times across the decades. The major balance that we have been operating under was set up in 1980 to 1984 by Reagan with capital being freed to increase productivity and the availability of stuff to buy on the shelves – no on had to worry about consumption as they were banging down the door. The baby-boomers were building their families, buying everything. That structure is now wrong. After some ups and downs – me, a baby boomer is not buying stuff. One of my college roommates of years ago said he and his church-going wife bought no Christmas presents last year and will none again. Labor – young one – don’t make enough money. Minim wage people are buying from minimum wage people – back-and-forth. Capital has enough – Trump swept the rich on low taxes – that was a crime. The old won’t buy and the young are broke. Not good.