Looking into our crystal ball for 2025, we had to channel our inner Clint Eastwood for his famous movie made in 1967 (before some of you were born).  It could have been Dirty Harry (“Do you feel lucky Punk?"). So, let's stick with the first - and try to apply it to our outlook.

 

First, the Good. And there are plenty of good in the important areas - Profits, Revenue and Earnings. And at the end of the day, it all comes down to Earnings and its measurement of EPS. It continues to roll on. For the 4th quarter 2024 we are looking for corporate profits (S&P 500) to grow in the 9-11% range.  And for 2025 we anticipate à 15-20% growth in EPS. From the chart below (courtesy of J.P. Morgan), they are looking for an EPS of $239 for 2024, $274 for 2025, and $311 for 2026. That is very close to the Yardeni Research #'s of $243, $275 and $310.  Ed Yardeni and his team have proven to be amongst the best predictors in recent years.  Also note in the chart below the graph on the right - Profit Margins. We are in a rarified air of corporate profitability- and it should get better.

CHART 1

Also, the whole GDP will have another ‘decent' year.  As we come off the cyclical expansion from the covid crisis, the GDP may downshift slightly to a more normal pace. 2024 will probably come in at the 3.1% range, where 2025 should be in the 2.5 to 2.75% range.

 

The is still some concern about ‘valuation’ and rightfully so. As our favorite measurement of profits and market expectation, the P/E (or price/earnings ratio) got into the historically overpriced area (P/E’s of 22 and 23).  And this has slightly corrected itself into the 21 range.  We think the 20-21 area is to be expected for the market’s expectations of growing earnings by 15-20% the next few years (the E in the P/E ratio) then the Price of the Market (the P in the ratio) should reasonably grow in the same neighborhood - give or take.  From the chart below (courtesy of Yardeni Research) you can see an obvious pattern of growth and profits.  In English, this means if earnings grow 15%, then the market should go up 15% - give or take.

CHART 2

The problem is when the markets get ahead of themselves, and price runs up too fast and too soon - buying in anticipation of what ‘might’ happen.  One of the best indicators is the bull / bear ratio- which I have shown here several times. As a refresher, when you are bullish, most likely you have already bought. And that leaves you with 2 options, hold or sell. It works the same in reverse. So, when the ratio gets high, you should sell ... and vice versa.  From the current chart you can see the markets are back to normal if not slightly bearish. This is due to the recent sell-off in the markets. What you can't see in the data from 12-4 ... where it was 48.3% bullish and 30.7% bearish... almost an 18% difference! And the correction started the next week. Scary how accurate this indicator works.

CHART 3

Finally, we should mention that government deregulation, proposed corporate tax reduction and the overall ‘Wealth Effect’ should also help the case for the Good!

 

One the Bad side, they have plenty to be careful about.  The main ammunition is still inflation and interest rates. Even though we believe inflation is still coming down, it is still very stubborn. And the Fed may be done reducing rates for a while. Safe to say there is no reduction in January and for March it's currently at 50/50. But the real damage is coming from the ‘Bond vigilantes.’  In a nutshell, as the Fed has reduced short-term rates (1-3 years), the longer- term rates have gone up. Since September the Fed has reduced rates by 1% - but the ten-year rate has gone up 1%!  And the ten year is tied to loan rates and mortgages. Bond buyers (Vigilantes) want higher rates if they are going to buy bonds.

 

On this same vein, we may be on this same topic for U.S. Treasury Bills.  And this is becoming serious! Let me explain.  The Treasury Department (who pays the bills) would like lower interest rates - as they have to pay interest on the National Debt (Like buying a house with a lower mortgage rate!). But with the growing National Debt it is becoming riskier for buyers of U.S. Government Bonds. There is even serious talk of another U.S. debt downgrade. So, the buyers of T-Bills want a higher return on their investment. We have always said that we will start worrying about the Fed defect when bond investors begin to worry about it.  Is that now happening??? Government (yes, both parties share this) has to realize this and at least start to do something. Waste is a good place to start. The DOGE boys will bring that to the attention of the markets. But nothing proposed. We will be watching this closely.

 

And now the UGLY. Be aware of some serious volatility down the road. We had 7 market pull backs in 2024, and the market kept reaching new heights. But all the pull backs were minor 4-5% with one 7%. We expect more 7-10% corrections. The ‘average’ largest correction annually over the past 50 years has been 13.3%.  That might happen soon. How will you react??

Here's a little bit of help from Fidelity to help remind you the next time we have a correction.

CHART 4

This already too long report did not even mention other ‘possible’ situations like Ukraine war, Geopolitical, the U.S. Dollar, International, etc., etc.

 

Bottom line we expect the S&P 500 will reach 7,000 by the end of 2025 (at 5865 as I write this). Keeping the faith and true to your own personal risk allocation should help you in the long run. I leave you with the asset-class returns. Note last year, Large-Cop was the big winner ... maybe the only big winner. Most everything else was 'average.’ Focus on the white asset allocation boxes.  You win by never losing!

 

Enjoy the ride!

CHART 5

- John Osborn

Quote of the Month 

"The difference between success and failure is not which stock or piece of real estate you buy, it's asset allocation".

– Tony Robbins

Past performance is not a guarantee of future results. Indices mentioned are unmanaged and cannot be invested into directly. Diversification and asset allocation strategies do not assure profit or protect against loss.  These are the opinions of John W. Osborn and not necessarily those of Cambridge. The views expressed herein are for informational/educational purposes only and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.