2024 Q4- 2025 Q1
December 1st, 2024
Our quarterly S&P 500 forecast for 2024 Q4 (average price returns) indicates a 5.9 percent growth over the previous quarter. We predict 4.6 percent growth for 2025 Q1 over the last quarter of 2024. Our monthly forecast for December is lower than November’s average. Geopolitical problems such as the Russia-Ukraine, and the Israel-Palestine conflict cannot be captured in a forecast model. Thus, any uncertainty concerning these issues makes the 95 % confidence interval around the point forecast rather wide.
Trump’s victory fuels the bull market
Following Trump’s landslide victory in the presedential election, the S&P 500 market rally gained strong momentum. The S&P 500 gained 5.3 percent in November over the end of October. The performance was akin to that of the Nasdaq composite index (5.36 %).
President-elect Donald Trump and his party will maintain control of the House of Representatives and the Senate. This allows Trump to implement his policy agenda. The market rally is based on an optimistic view of Trump’s election promises such as lower taxation at the individual and corporate levels, and reduced regulation.
Another election promise is the pledge to reduce energy prices. At the Republican National Convention in July, Donald Trump promised to lower gas prices by boosting domestic oil production. “We will drill, baby, drill,” he declared. In reality, oil companies focus on minimizing costs and keeping profitability high rather than expanding production. Trump’s drilling pledge is unlikely to happen any time soon. That said, the WTI Crude was down 1.05 percent in November.
Historically, US presidential elections did not have a statistically significant impact on the US stock market performance. In the short term, the promise of lower levels of taxation and regulation fuels the stock market rally. In the longer term, it remains to be seen if all aspects of the election agenda would sustain the market rally.
Euphoria based on sentiment
Currently, investors seem to have chosen to focus on the pros rather than cons of Trump’s policy agenda. Higher tariffs on imports would increase the costs for corporations that rely on imported intermediate goods. Tax cuts would increase consumer spending, but mass deportations are likely to reduce the labor supply, pushing wages higher.
Given the increased probability of higher inflation and tighter monetary policy in 2025, the stock market’s euphoria is not based on realistic fundamentals. Cutting taxes without cutting government spending would make the budget deficit grow. Increasing national debt and borrowing costs would impede US economic growth.
Lately, as interest rates are cut, US households are increasingly allocating their savings to equities. Given that the semiconductor sector is facing higher uncertainty from future trade wars and high tariffs, it is difficult to justify the market optimism. The S&P 500’s growth over 20% in 2023 and 2024 is a reminiscence of the dot-com bubble.
We believe the bullish sentiment may continue till the end of the year with the rate cut in December. Trump’s administration’s pledge to end the war in Ukraine also contributes to the positive investor sentiment. It remains to be seen if the overvalued stock market can extend the gains to 2025. We expect some correction in the coming year, but this is expected to be later than Q1.
GDP Q3 growth is stable at 2.8 percent
The United States’ Gross Domestic Product (GDP) expanded at an annual rate of 2.8% in 2024 Q3 according to the second estimate (Source: the Bureau of Economic Analysis (BEA)). This was in line with the previous ‘advance’ estimate.
So long as consumer spending which accounts for more than two-thirds of U.S. economic activity, stays healthy, the US economy is not expected to have a hard landing. Consumer spending is related to job creation. Only 12,000 US jobs were added in October, well below the Dow Jones consensus forecast (100,000 jobs) and September’s figure (254,000). US unemployment is unchanged at 4.1 percent. The latest job creation numbers raise some concerns about the future of consumer spending.
Retail sales edge up, home sales continue to grow
Starting with the economic data, retail sales rose slightly in October whereas home sales had a strong momentum:
The advance estimate of U.S. retail and food services sales for October was up 0.4 percent from the previous month (both seasonally and inflation-adjusted). This estimate was 2.8 percent (±0.5 percent) above October 2023.
The National Association of Realtors index of pending home sales increased 2 percent in October after jumping 7.4 percent in September. The Pending Home Sales Index leads existing home Sales by a month or two. The latest figure shows the US housing market’s recovery continues its strong momentum after stalling in July. The US home buyers are getting more optimistic about the prospect of interest rates being cut with falling inflation.
Labor market was tighter in November
In the week ending November 23, the advance figure for seasonally adjusted initial claims was 213,000, a decrease of 2,000 from the previous week’s revised level. The 4-week moving average was 217,000, a decrease of 1,250 from the previous week’s revised average.
The advance seasonally adjusted insured unemployment rate was 1.3 percent for the week ending November 16, unchanged from the previous week’s unrevised rate. The US unemployment was stable at 4.1 percent in October. Once again, the initial jobless claims are much lower than the critical 250,000 mark. The latest unchanged unemployment rate signals that the labor market is not loosening quickly. Having said that, this does not change the investors’ anticipation of a rate cut in December.
PMI deteriorates, consumer outlook shines
The Chicago Purchasing Managers’ Index (PMI) fell to 40.2 in November from 41.6 in October. This was below the market anticipation of 44.9. The index’s long-term average from 1967 to 2024 is 54.7. Hence the current value indicates a contraction in business activity.
The Conference Board’s consumer confidence index jumped in November to 111.7 from 109.6 in October (1985=100). The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—increased to 140.9 (1985=100) from 136.1 in October. Furthermore, the Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—increased to 92.3 (1985=100) from 91.9 last month.
A reading above 80 for the Expectations Index would indicate that consumers are no longer concerned about a recession. For a long while the Expectation index hovered below 80. The recent improvement in consumer confidence indices reflects optimism regarding the strength of the economy.
Inflation edges up again
The annual inflation rate in the US accelerated to 2.6 % in October 2024, compared to 2.4 % in September. This was in line with the analysts’ expectations and the news didn’t faze investors much.
The Federal Reserve’s preferred metric — the personal consumption expenditures price index- increased to the annualized rate of 2.3 in October from 2.1 in September. This was also in line with the market forecasts. Core inflation, which excludes food and energy, showed an annualized rate of 2.8 % in October, slightly up from September (2.7 %). All these data were in line with the Dow Jones consensus estimates. Although these price changes are still above the Fed’s target of 2 percent, the price stability is encouraging enough to warrant another rate cut in December.
Markets expect that despite the labor market’s resilience, the Fed’s policy of monetary easing will continue. Two-thirds of traders are expecting the U.S. Federal Reserve to lower rates by 25 basis points at its December meeting on December 17-18.
Real consumer spending, which is a significant driver of economic activity in the U.S. increased 0.1 percent in October after rising 0.3 percent in September. This was in line with the market’s forecast.
December rate cut on its way
After September’s and November’s interest rate cuts, the markets are pricing another 25bp rate cut in December. The Fed and the markets are ruling out a hard landing for the US economy despite the slower growth in Q3 and very few jobs created in October. The inversion in the yield curve at the end of August disappeared and at the end of November, the difference between the 10-year and 2-year US Treasury Bond yield was positive (0.05). Although this indicates that investors are no longer worried about a recession, the figure is lower than its value at the end of October.
The 10-year U.S. Treasury Bond yield ended October at 4.18, slightly lower than October’s 4.3 percent. Despite the election results and the possible inflationary impact of Trump’s tariff policy, markets are unfazed.
Fed is expected to announce a 25 bp rate cut in its 17-18 December meeting. Despite the slight increase in the inflation rate, we expect the Fed will go ahead with its front-loaded rate-cut policy. We believe the Fed will evaluate the impact of the US tariffs in 2025 when/if the policy is implemented. If the policy is redeemed inflationary, the Fed may choose not to loosen its monetary policy in 2025. One cannot foresee the impact on inflation as other factors such as energy prices are at play. If the war in Ukraine ends peacefully in early 2025, the combined impact on US inflation may be less than feared.
US corporate earnings were stable in Q3
The US corporate earnings with inventory valuation and capital consumption adjustments (domestic industries) were stable in Q3, slightly edging up over Q2. The recovery owed to lower production costs, as a result of the cooling inflation. The earnings were up 0.8 percent from the previous quarter and 9.3 percent over 2023 Q3. Despite the steady growth, the percentage of companies reporting EPS above the mean EPS estimate is below the 1-year average (78%) and below the 5-year average (77%).
Our consumer sentiment indicators are based on our ‘keyword’ algorithm related to ‘Google Trends’. Accordingly, these indicators are among the explanatory variables that predict US corporate profits. Our prediction for 2024 Q4 is stable corporate earnings, with a steady 1 percent growth over Q3. We expect the earnings to be 4.5 percent higher over 2023 Q4.
The historical data from November 30th, 2024
The S&P 500 remains overvalued
According to Factset Insights from November 22, the forward 12-month P/E ratio for the S&P 500 is 22.0. This P/E ratio is above the 5-year average (19.6) and above the 10-year average (18.1).
For Q3 2024, Factset estimates the (year-over-year) earnings growth rate for the S&P 500 to more than double its annual growth in Q3, mainly driven by the strong contribution from the financial sector stocks. Our forecast is not as optimistic as discussed above.
The graph below shows the S&P index forward P/E ratio, calculated using the monthly interpolated US company earnings and the S&P 500 index (indexed to 21 for June). As can be seen, the P/E ratios were also over 20 for long periods in the past. Although the forward P/E ratio is high by historical standards, we do not expect a sharp downward correction to come in 2025 Q1.
