A Market Outlook: Expect Slower Growth and Modest Market Gains in 2025

Jeffrey Buchbinder:

Hello everyone, and welcome to the latest edition of LPL Market Signals. Jeff Buchbinder here, your host for this week, with my friend and colleague, Jeffrey Roach. How are you today, sir? Thanks for joining.

Jeffrey Roach:

Hey, doing well. Joining you from our corporate office here at LPL instead of the home office. So I'd like to mix it up.

Jeffrey Buchbinder:

Very good. In Fort Mill, South Carolina, not too far from Charlotte. So thanks for joining. Jeff. We have an exciting special podcast for you today because we're going to talk about our 2025 Outlook. The publication was just released. You can find it on lpl.com and you know, we're going to hit on the economic and stock market pieces of that publication, but certainly there is much, much more. We'll also quickly just squeeze in our normal stock market recap and week ahead look, but mostly it's going to be about next year's outlook. So excited to bring this to you. You know, quickly for the market recap, I mean, last week was all about big tech and more new highs. So you see here S&P up one, the Nasdaq up over three. The big tech sectors, obviously tech as well as consumer discretionary and communication services were the leaders.

Jeffrey Buchbinder:

And you know, you can really see that dramatically on this table because look at the five-day performance for the Russell 200 growth versus the Russell 200 value plus 3.8 for growth minus two for value. That's about as big of a gap as you will see. The mega cap tech outperformance is also evident when you look at the equal weight S&P versus the market cap weight S&P. The market cap weight did much better last week. In fact, it was the biggest outperformance by cap weighted S&P, which is the traditional S&P, versus the equal weight S&P since July. That was really the story. We had some good earnings in tech land and you know, and rates cooperated and economic data was pretty good. So, Jeff, thoughts on you know, the market advance last week and then maybe you know, turning to international where we've just had a crazy amount of geopolitical events creating, you know, about as much uncertainty as you can have.

Jeffrey Roach:

Yeah, yeah, you're right.

Jeffrey Buchbinder:

In Syria and, you know, government, you know, leadership changes or other political uncertainty and, you know, Germany and France and South Korea and elsewhere. So maybe put that in perspective for our listeners.

Jeffrey Roach:

Yeah, so you're right. There was a lot of interesting things that kind of set the stage, not only for last week, but also what we're seeing going into the remaining parts of the year. So, of course, we had a little more clarity on labor market when last Friday the labor market report was released. We're now a month removed from the impacts from Hurricane Helene, which provided a little bit of unusual volatility and uncertainty in the markets. We just didn't have a really good, clear look at how job market was behaving. So a fairly positive job market report. And then, of course, the big news, I think last week that's set the stage for where risk appetite is, is chair Powell basically removing some of the uncertainty that the Fed is going to indeed cut in December or January.

Jeffrey Roach:

But they're not going to be on a prolonged pause for a while. Then I just want to highlight one thing on the Japanese front. So we show in this chart, you know, just not only the sectors in the left side domestically, but if you look at to the right side, you see Europe, Asia, Latin America. Wanted to draw your attention to the bottom right with Japan, Nikkei. Nikkei recovering in the last five days, and it's a little bit of a payback. They're lagging behind domestic markets ever since the cut surprise, sorry, surprise hike in the end of July. They're starting to really have a concerted effort to follow the Federal Reserve's strategy actually, and over communicate, try to communicate a lot clearer to markets, what their thoughts are in terms of policy and the path for policy. So be on a lookout for 2025 to be an interesting year for Japan markets.

Jeffrey Buchbinder:

Yeah, this is ECB week, not BOJ week, but nonetheless, global Central Banks will be a focus for investors next year for sure.

Jeffrey Roach:

Exactly. So it, well, one more thing too, you know, we don't really talk about this a ton, but, you know, so Fed is making their decision on the 18 of December, not only decision, but they're also releasing the summary of economic projections, so an update on their forecast. And then of course, the BOJ is meeting the 19. ECBs meeting this week, as you say. They all do try to cluster their meetings together, and it's actually on purpose. They do that to try to at least synchronize their strategies.

Jeffrey Buchbinder:

Yep. Interesting. We know, yeah, the Fed's coming up soon. So certainly this week's CPI will be an important consideration for them when the Fed meets next week. So actually before we keep, before we advance getting a little ahead of myself. So the bond market was part of the story last week too, because we had a we had a rising Barclay, you know, Bloomberg Ag and we had lower rates, which of course in this environment is good for stocks. So that I think that helped prop us up a little bit as well. So back to stocks though. Here's the S&P 500 chart, and I priced this this morning. It's Monday afternoon, December 9 as we're recording this. So we've pulled back a little bit today in part on the geopolitical issues as well as you know, some concerns about trade retaliation we'll say with with chips and China.

Jeffrey Buchbinder:

But nonetheless we're still at the top end of this rising price channel, and we've been saying this for a while, that that's a logical place for a pullback. I mean, we're only down about a half a percent today, but this is a logical place for a pullback. And you know, maybe we go back down to the 50 day average. We think there's probably at least a couple hundred points of downside on the S&P 500, at least in the near term. So Jeff, you alluded to it, the you know, the jobs report certainly on Friday helped the market at least, you know, maintain its gains for the week. So I put a few charts in here that show the you know, some perspective, I guess on the job market and maybe what, how the Fed will react to the report from Friday. So why don't you take us through that.

Jeffrey Roach:

Yeah, I think the Fed. Right, the Fed will focus more on the longer-term averages, not the month-to-month moves. In fact, it's a good reminder for our audience, for themselves to do the same thing. Don't look at the month to month gyrations, because that's going to be a lot more choppy than what the six-month moving average will tell you in the trajectory. And I'll give you a nice little bumper sticker in terms of this graph. You look at the columns, that's your month-to-month. Your orange line is just taking six-month average of those monthly changes. And it tells you, you know, the first half of the year we were adding jobs in some sectors, still recovering jobs and kind of coming back up to where demand was for particularly leisure and hospitality, restaurants. It was the first half of the year, and then you have this nice little slide, and we're hovering pretty consistently at about 150k on a six-month average basis. So your bumper sticker would be, you know, this is the angle of that slide is something that would not be really scary for your average toddler, right? It's not a steep slide, it's not a cliff. This is a fairly measured slowdown and you see it in this chart. It's consistent with I think how markets are responding. Even after last Friday's jobs report,

Jeffrey Buchbinder:

When I was a toddler, Jeff, I think the slides were a little steeper and safety was not as big of a concern on public playgrounds. So I'll throw that in real quick. So you've been highlighting how continuing claims is connected to unemployment. What's the key takeaway here?

Jeffrey Roach:

Yeah. So, you know, I think what's nice is you investors, those that are, you know, watching the markets, listeners to this podcast realize, you know, there's a lot of data that comes out on a quarterly basis. Some come out on a monthly, some little less frequent and a little more rare. Less reports come out on a weekly basis. But one of those reports that come out every Thursday morning, 8:30 eastern time, is the number of those that are collecting unemployment insurance. We actually talk about the initial claims. Those that are initially collecting and I should say applying for those benefits. And there's also a number that gets published, which I think is even more important. This is what I'm actually showing in this graph. Those that are continuing to claim unemployment insurance benefits. That comes out every week.

Jeffrey Roach:

And it's a great way to get in a quick read at what's happening and what could happen in those monthly non-farm payroll reports. So this chart's basically just saying what we're seeing in the data right now, as of the last several Thursday reports, and this has actually happened for several months now, suggesting that unemployment rate has a potential to tick upward. We actually saw it last Friday, 4.1 to 4.2. We could see it continue on up to 4.3, 4.4 for December going into next year. So that's something that I think we should not be surprised at all. We should expect that unemployment rate will uptick in the next several months, given the data.

Jeffrey Buchbinder:

That is part of our 2025 Outlook, which you'll see in a moment. So the question, Jeff, is what does that mean for the Fed?

Jeffrey Roach:

That's right. So if we know that there's upside risk with unemployment rate, we're not talking about, you know, a dramatic slowdown in hirings, as I alluded to on that angle of that slide. If you're sliding down from the first half to the second half of 2024. But we can also make a pretty strong argument with the data that the Fed can indeed cut. They can narrow that gap between the light blue line, which is the Fed funds rate, upper bound, and then the actual inflation rate, which is the darker blue line. They can keep cutting, narrow that gap and still remain restrictive. That's been the big argument. Why do we need a Fed cutting if you still have inflation challenges? Well, the Fed can cut, remain restrictive but not as restrictive as the labor market cools, unemployment rises, and we see a little bit of loosening in the labor market, so expect the Fed to cut. We don't think that they're going to be on an extended pause. That's the key takeaway here.

Jeffrey Buchbinder:

Very good. So let's get to the good stuff, Jeff. That was good stuff too, but this is the really good stuff. Again, 2025 Outlook is out on lpl.com. We're just going to give you a couple of sections of it. But you know, I think two of the more important sections. Sorry, Lawrence Gillum, Fixed Income Strategist. But you know, economy, stock markets, I'm biased. Most interesting. So Jeff why don't you take it away and tell all of our listeners and viewers what to expect out of the economy in 2025?

Jeffrey Roach:

Well, you know, what we did, Jeff, is we were writing the Outlook. We did start writing it before the election. We were thankfully able to tweak some things after the election, but instead of focusing on all the unknowns in the new Trump 2.0, you know, what might happen with tariffs, what might happen here and there. It's a lot of uncertainty, but I think there are some things that we do know with a little more certainty. And so we focused on that with our publication from the Outlook. And here are a couple key points here on the slowdown, but not catastrophic slowdown. That's hence the not recession. And then we add a little bit of interesting color for the corporate side. We talk about consumer spending a ton. That's okay because that's a big part of how the economy is tracked by what consumers are doing at the stores.

Jeffrey Roach:

But it's also very important to think about what businesses are doing. And I show a graph in that outlook, talking about the idea that going into 2025 and throughout 2025 actually might be a very good pro business opportunity, particularly for capital expenditures on the corporate side. So that's a little bit there. I won't go through the rest of the bullet points because the charts that I'm going to show in a little bit build the case. And really part of this is really just teasing our audience to go out, go ahead and read the full Outlook. because Then you get the whole thing. Soup to nuts on that.

Jeffrey Buchbinder:

Because it is long, just absolutely read our two sections.

Jeffrey Roach:

Yes. So, you know, what's interesting, and I wanted to, you know, kind of highlight the fact you, we, a lot of investors and a lot of professional institutional money managers talk about the micro drives the macro. A lot of different folks say that. In fact Scott Bessent, probably the new Treasury secretary talks about the micro drives the macro. And I think one of the things that's interesting about that is to say, okay, if you read about what businesses are saying that can help develop a view, and businesses had been very, very clear that they were holding off capital expenditures that they already budgeted and they already planned on doing until clarity in the election. And we're starting to see businesses make good on that. Meaning there's a little bit of this pent up demand because businesses have been holding off for actually quite a few quarters. One of the things I wanted to highlight, not only just in general CapEx, but also the research and development component of CapEx, not necessarily as big as consumer spending. And this is what I'm just showing here. There's, there's an opportunity for intellectual property products, the research and development component. So think of businesses upgrading their software, buying computers, buying machinery, all that could support growth even if the consumer slows down a little bit. So that's one of the things that we tease out in the Outlook.

Jeffrey Roach:

And then I'll show a few more slides then we'll jump to you, Jeff, on some of the equity side of things. You know, one of the things that's helpful to think about as you go into different stages of how the economy's behaving and business cycle analysis has been challenging really ever since Covid, right? We've never had a business cycle where the amount of shutdowns hit so many different categories in different ways, right? So we weren't going on cruises, we weren't going on international vacations. You know, in '21, even 2022 for that matter. Europe was still shut down. But we could still buy off of our Amazon app. And that was kind of an unusual behavior. So, outside of business cycles and some of the data there, I'm building the case that it's also interesting and important to include in your analysis on business cycles and where the economy's going, include some type of look on the demographic side of things.

Jeffrey Roach:

What does the economy look like? What are the economic agents look like? And what I think is fascinating is the millennial cohort now just entering their peak spending years and their peak earning years for that matter. And we've seen from other data that of all the category and age categories millennials seem to be in a pretty good shape right now. Right in the 2024 and the years leading up into 2024. And then preparing for that 2025 Outlook, we'd really wanted to highlight the value of demographic analysis. So at this point you know, think about what could support the economy given an unknown shock that might happen, right? Shocks are typically what brings out a recession. Jeff, as you know you know, a lot of things about, think about all the recessions over the last several decades. The great financial crisis, of course, you know, a banking shock, 9-11, a shock. Asian crisis, long-term capital management blowing up, you know, all these different shocks. If we go through another shock, there are certain cohorts, particularly the millennials and the well-healed millennials seem to be entering 2025 on a pretty good foot.

Jeffrey Roach:

So what does this mean? So we talk about CapEx, we talked about AI component and research and development component on the corporate side. When you think about the consumer side, again, that's two thirds of the economy. That's why it gets so much airtime if you will. Two thirds of the economy is consumer spending both on goods and services. And so what I think it's really helpful if you want a good indicator on how the economy's going track the upper income household. So you could talk you know, luxury brands, right? Jeff, you sometimes bring that up in some of our meetings on the equity side. Where are the upper income, middle and upper income for that matter, where are they shopping? How sensitive are they to price changes? How is their experience going? And that certainly is a great leading indicator for where the overall economy's going. Hence, key takeaway 2025 probably softer than the breakneck speeds of 2024 from a GDP growth standpoint, but still growing, but not as strong as we've seen over the last several quarters.

Jeffrey Buchbinder:

I think that well-heeled consumer is part of why, you know, so many folks have been surprised over the last couple years at how well the economy's held up, as you alluded to, the consumer is mostly the economy and the spending is really driven more by the, you know, the upper income folks. Those are the folks with the low mortgage rates. And you end up with a really big, strong foundation for consumer spending. So I think that's a really important point.

Jeffrey Roach:

Yeah, that's right. And I actually think it showed up in last year's annual Outlook, or maybe the mid-year, but specifically on the number of households in the U.S. that refied in 2021, it's phenomenal. Really does explain a lot for how we're sitting even this year and going into next year.

Jeffrey Buchbinder:

Yeah, it wasn't just stimulus checks flying around. So next up inflation.

Jeffrey Roach:

Yeah, so we talked...

Jeffrey Buchbinder:

What we said earlier, but yeah.

Jeffrey Roach:

That's right. So we briefly talked consumer, briefly talked business side, corporate side. So let's think inflation Fed. You know, the Fed has a challenge because we've come off the peaks of inflation, but we're still running hot. Part of the reason we're running hot is because there's still this pretty strong demand really for services in general, starting to see a little bit more cooling in the goods component, but we're still waiting to see a little more cooling in the services side, and that will finally allow some of the inflation rates to get closer to that 2% target. We're still hovering a little bit higher. I think we're going to get a little bit of head fakes in the next couple of months. But I think if you can, if you have the patience and those that are long-term investors, should have that patience. If you have the patience, you know, by the time we hit April of 2025, so several months from now, we should actually see some inflation prints coming in below 2%. And that will certainly help risk appetite in the markets.

Jeffrey Buchbinder:

I'd still be surprised if the Fed declared victory on inflation even if we do get some of those sub two readings. But certainly the markets would love that.

Jeffrey Roach:

Well, and the problem is it's not going to stay sub two for a while. So and this is the challenge with some of these year on year comparisons. You know, so I said April, and you can, you can hold me to it. I'm a forecaster, so you got to keep me honest here. By April, we'll see below 2% on some of these core rates. But you know, by the time you hit summertime, it'll probably tick back up a little above 2% again next year. And hence that's why the Fed's going to be cautious. We're not going to see very aggressive cuts next year, but there certainly will be cutting, but on a pretty slower pace.

Jeffrey Buchbinder:

Yeah. And if you're wrong, by April, people will forget you ever made the prediction. So you're safe either way.

Jeffrey Roach:

The internet doesn't forget. The wayback machine.

Jeffrey Buchbinder:

Good point. So here's your summary. Why don't you run through the quick takeaways and then it'll be my turn.

Jeffrey Roach:

Right? So yeah, the slowdown in growth, we've been doing a really above trend. We're going to get to trend or maybe even a little bit below trend 2025. A little bit of unknowns, of course, in terms of what trade wars might do to the consumer. But watch CapEx, that's the business side. About 15 or 16% of the economy. Labor market has slowed pretty nicely, not too dramatically. Certainly markets hate uncertainty as we know, right? So that's a good thing. And then inflation Fed really kind of goes hand in hand. We'll have a little bit of a head fake, but the Fed will indeed continue to ease in 2025, but at a slower pace.

Jeffrey Buchbinder:

Very good. And that's a good kind of set up for the stock market outlook, because of course the economic environment is very important in figuring out what the stock market's going to do. So you know, here are my key points. I guess I've got fewer points, but they're a little beefier points. So first, you know, we expect solid earnings growth and stable rates to at least help stocks maintain they're rich valuations in 2025. Next lower rates, productivity gains and potential market friendly policy changes are keys to potential upside. So if we're going to get a little bit of multiple expansion, which is not our base case, but if we're going to get it, we think these are the three ways you get it, you know, rates, productivity and policy changes. Next risks a potential pronounced economic slowdown, of course, not our base case.

Jeffrey Buchbinder:

But of course a risk reaccelerating inflation, which Jeff, you just talked about, if we do get reaccelerating inflation, you're going to have rate volatility and you're going to have disappointment, market disappointment around the pace of Fed rate cuts. And of course geopolitical threats. We don't even have to sell you on that idea as a risk. You just read the news every day. Now we have to worry about a you know, power vacuum in Syria. But there was a number of other risk, widely known risks in terms of Russia-Ukraine, the Middle East broadly, and you know, China-Taiwan, just to name a few. Tariffs, trade policy could drive a trade war with retaliation a number of geopolitical risks to watch. So those are some of the reasons why we think you should be a little bit careful with you know, equities here.

Jeffrey Buchbinder:

So we're still neutral. We still think fair value for equities is higher, you know, at the end of 2025 than where it is now, but we are not predicting a boom year by any stretch. So I'll also highlight that sentiment is a reason to be a little bit careful here. We think because it is a bit stretched, which is related to, but slightly different from valuations. So I'll go through, I've got four Outlook charts here. I'll go through them really quickly. And then you know, we'll get to the week ahead. So first is this is just the history of bull markets by year. And you can see here year three, which we just entered in October. Historically, performance is a little bit more mixed. Now if you take out the recessions, you tend to get double-digit return years.

Jeffrey Buchbinder:

So could we be up 10%? Sure but our forecast implies something more like mid to high single digits which is fairly consistent with a third-year bull market that is not accompanied by a recession. The Xs in the year three column are just years that are bull markets that didn't make it through year three. For the ones that did you see the average return, this is price return is 5.2%. Yeah, the dividend on top of that that wouldn't be bad. So our forecast, our year-end price target is, or fair value target is 6,325. We put a range around that. So that's kind of consistent with the sort of mid to slightly above mid single digit total return. So next, you know, we look at cycles when we do these forecasts, whether it's an economic cycle, a presidential cycle, a monetary policy cycle.

Jeffrey Buchbinder:

So here's the Fed rate-cutting cycle, essentially. If you just look at how stocks have done after the Fed starts to cut rates you see it's kind of up and down. But what's important to keep in mind is that the downs are recession years, right? So '81, '01 and '07 were certainly, you know, the Fed cutting to prevent recession or limit the downside where recession was already developing. If you take those out, the average here, again, the average gain about 10% ex-recessions when the Fed is cutting rates. So that is a path to a pretty good 2025. Maybe not what we had this year, up almost 30 right now, but path to a good 2025 for stocks, if you have the Fed cutting and no recession. You know, when you look at what's led in 2024, of course it's big tech.

Jeffrey Buchbinder:

Big tech might lead in the first half of 2025, but we think the sledding is going to get tougher. And here's why. The orange bar is the Mag Seven earnings growth, and the the blue bar is the earnings growth for the broad market, including all, you know, the S&P including all 500 names. And this gap is narrowing quite a bit. So we think while we're suggesting a slight lean toward growth stocks right now and into 2025, at some point, we think this is going to reverse, and you're going to start to see better performance from value because the market's going to see less of an earnings growth advantage from owning big tech in the Mag Seven. So this is not a bearish call by any stretch. This is just part of this broadening out theme that a lot of folks are talking about.

Jeffrey Buchbinder:

So next, you know, again, another reason to be a little bit cautious is sentiment. So this is a survey that from the conference board surveys consumers, and asks them do you think the stock market's going to go up in the next year or down. The percentage saying up is the highest it's ever been. And this survey goes back to the late eighties. Now, the caveat here is that this is a pretty small survey. Actually, we have this in the Weekly Market Commentary this week, also on lpl.com, where we point out that the survey is only a few thousand consumers, but nonetheless, it's got a long history makes a point that sentiment is a bit stretched and it's going to be hard for the market to find a whole bunch of new bulls to initiate buys and push this market higher.

Jeffrey Buchbinder:

So valuations, high sentiment stretched, we think we're ripe for a pullback. And as you see here, the last bullet point we favor buying dips. So again, positive year, we think, but maybe in the first part of 2025, be a little bit more careful wait for dips and you could potentially get better at buying opportunities than you have now. So just go through these again real quick. We expect valuations to hold, not expand, kind of in that, you know, 21, 22 times area going to be really hard to go much more than that. So it's really about earnings to drive us higher if we're going to have, you know, something better than mid-single digits for next year. Next, if we are going to get upside, it's going to be about rates, productivity and policy. And then in terms of risk, in addition to valuations and stretch sentiment with a, you know, could potentially get more pronounced economic weakness, potentially a re-acceleration in inflation.

Jeffrey Buchbinder:

And then geopolitical threats. Not our base case to have a pronounced slow down or a recession. Not our base case to have any sort of renewed acceleration in inflation that's sustained, but certainly a risk. So there you go. That's I think about as quick as I can do it. There are some of our high level thoughts on 2025 for stock. So let's get back to you, Jeff, on the week ahead. And I think inflation is probably the number one focus for investors this week. But certainly we're going to continue to watch the geopolitical developments and certainly we're going to watch the ECB.

Jeffrey Roach:

Yeah, that's right. So in addition to the inflation numbers on the 11, you'll see the Thursday morning continuing claims numbers, so that'll be worth watching. But one key takeaway here is, I gave you a little bit of hint earlier in the podcast, talking about the little bit of the head fakes that we got to be careful about with comparing annual rates over time. The right way, I think a helpful way is to look at those month-to-month numbers. So we're showing that MOM month-over-month if you see a 0.2, 0.2%, that's a healthy clip. 0.3% month on month changes, that's typically a little bit more hotter than what markets and fixed income investors will want to see, Fed policy makers will want to see. So that's really the key point. You can keep on watching those monthly stats. We need to see that cool down from 0.3% month on month to point twos. That's your key takeaway. But expect a little bit of uptick in the annual rate for November, but that's going to revert the first half of next year, as I explained earlier. So there you have it. Last week it was about payrolls. This week about inflation.

Jeffrey Buchbinder:

We actually get a couple of earnings reports that might be meaningful too. Oracle is one. So keep a little bit of an eye on earnings, even though earnings season is behind us. And you know, we got a solid earnings season, solid, high single digit earnings growth, and we'll probably see that type of growth or maybe even a little bit better over the you know, next several quarters. So thanks for that, Jeff. Again, really excited to announce the release of the LPL 2025 Outlook publication. I mean, we didn't really, we didn't even get through half of it, right? Because we have a number of sections, certainly the fixed income that we you know, touched on a little bit, but not a whole lot. We have the alternative investment section. We've got a section on geopolitics, a section on commodities. There's a lot there. So we hope you enjoy it and excited to bring that to you. So thanks Jeff for walking through your economic outlook for 2025, your outlook on the teams. And for all of you out there, thank you for listening to LPL Market Signals. Pleasure to be with you again this week. We'll be back with you next week, everybody. Take care and we'll see you then. Take care.