One chief market strategist says he expects equity markets to deliver mid single digit returns in 2025, noting that gains over the past two years have been driven by valuation, but next year they could be driven by earnings.
IG Wealth Management released its 2025 market outlook on Tuesday, which laid out predictions for the upcoming year. The report noted that equity markets have delivered two strong years of returns driven primarily by valuations, noting that a “more selective approach” may be beneficial next year.
IG’s Chief Investment Strategist Philip Petursson, an author of the report, said in an interview with BNN Bloomberg Tuesday that high valuations present a significant challenge for investors going into the new year.
“If you look at 2024 and 2023 a lot of the gains were driven not by earnings growth, but by valuation expansion like PE (price-to-earnings) multiples increasing by 20-30 per cent in some markets. That’s what drove the TSX, that’s what drove the S&P 500. Eventually the baton is going to get handed off to earnings,” he said.
Petursson added that he thinks 2025 will be a “good earnings year” for companies listed on the S&P/TSX Composite Index and S&P 500 Index.
“With earnings growth projected to be as strong as it is, we expect a one to two point at least multiple contraction, which means that you should see a mid single digit return in equity markets next year,” he said.
IG Wealth Management’s 2025 market outlook noted that investors may wish to take a more selective approach next year, noting that amid a broadly supportive economic backdrop, it will be important to identify sectors and regions where valuation aligns with growth prospects.
“With valuations elevated, success this year could hinge on focusing on quality earnings and disciplined stock picking, rather than broad index performance,” the report said.
As the previous two years were driven by higher multiples instead of earnings growth, the report notes finding the right price for earnings is likely to be key next year.
“This suggests that returns may be less about the index and more about individual stock picking favouring value and a margin of safety,” the report said.
Given the current environment, the report notes that diversification is “always in style.”
“Given the economic, fixed income and equity backdrop for 2025, we believe diversification across asset classes, geographies, styles and size will remain investors’ best approach,” the report reads.
Investor sentiment
Petursson said he is seeing positive sentiment among investors ahead of the new year. However, he added that he thinks investment flows are a better indicator compared to surveys.
“And we’re seeing flows increase here and in the United States, that’s to be expected. Flows tend to follow strong returns,” he said.
“That doesn’t necessarily mean that strong flows will lead to stronger returns, but it means that investors are more confident at putting money into the equity market.”