Recapping our 2024 forecast, we were cautious on equities along with The Street. Expectations from Wall Street were for virtually no market growth.
The S&P 500 started the year at 4770. We all got it wrong. Wall Street’s biggest Bulls (Lee, Belski, Yardeni) were at 5100-5200.
Today, the S&P 500 is about 25 per cent higher than expectations were last year at this time. We were correct in suggesting something different would happen—we were wrong about the direction as we expected a recession.
Earnings per share (EPS) is likely to come in around US$242 for 2024, about five per cent higher than expectations a year ago.
So, the majority of the market gains last year were from multiple expansion. If strategists were cautious last year at 20X EPS, they should be very nervous this year with 12 per cent EPS growth forecast and a near record 25X.
But they do not appear to be. Of the 24 forecasters, only two think the market will be lower. The bulls are looking for the multiples to hold at 24-25X and for about 12 per cent EPS growth.
Over the past 100 years, the stock market was more likely to gain 10 per cent to 20 per cent annually than zero per cent to 10 per cent. Overall, stocks gained 20 per cent or more 39 per cent of the time, while dropping 26 per cent of the time.
An average year, which analysts are predicting, doesn’t happen all that often, despite the frequency of such predictions. Neither does a string of 20 per cent annual gains.
The S&P 500 has gained 20 per cent or more in consecutive years just three times in its history. It happened in 1935 and 1936, only for the market to plunge 39 per cent in 1937 when mistimed U.S. Federal Reserve rate hikes and fiscal spending cuts prolonged the Great Depression.
Things turned out better after the 20 per cent-plus rallies of 1954 and ’55 – the S&P rose 2.6 per cent in 1956. The most recent skein of hefty gains began in the mid-1990s. Stocks rose 20 per cent or more in 1995, ’96, ’97, and ’98, and almost 20 per cent in 1999.
For this scenario to happen, the U.S. economy needs to rule the world, Donald Trump deregulation must be in full force, artificial intelligence (AI) needs to keep its rapid growth rates, and the economy must have a perfect landing on inflation and employment.
We expect the U.S. to lead (the rest of the world is a mess), but we’re not sure about the perfect landing. There is always a recession at the end of every cycle, though forecasting the timing of it has proved to be very difficult in this cycle.
Last year, the yield curve told us that a recession was highly likely in 2024, and it was wrong. Watch jobs, jobs, jobs in 2025 – weekly jobless claims in the U.S. might be the most important indicator.
We were correct on our bearish view on the U.S. bond market, but the relatively weak economy in Canada saw bonds perform a bit better.
If the Trump agenda drives stocks higher, stronger growth and inflation will see the Federal Open Market Committee pause rate cuts and the bond market likely to post poor returns relative to cash. Look for 4.25 per cent in U.S. money markets and closer to 3.5 per cent in Canada.
Crude oil remains interesting to be sure. Less regulation under Trump should increase supplies. The strategic petroleum reserve needs to be replenished.
That should keep the market bid under US$70. A recession, should it come, opens the range below $60. The negative prices during COVID-19 are an anomaly, and let’s hope we do not see that for another 100 years.
But it’s also clear to us that even with the Middle East conflict and the Russia-Ukraine war still raging, the upside for crude oil seems limited with China growth struggling. Let’s call crude a range trade at best.
For gold, we argued that there was not a catalyst in 2024 for gold to breakout. While we were generally bullish, we thought it would take longer to play out. The lack of fiscal prudence in U.S. Congress is not likely to improve under Trump.
We’ll see what impact the Department of Government Efficiency (DOGE), run by Elon Musk Vivek Ramaswamy, has but the reality is that it’s hard to cut much in discretionary spending to pay for all the tax cuts planned.
And finally, when it comes to the Canadian dollar, we should look to hedge longer-term exposures.
Historically, the loonie is a buy at these levels, especially with a change in government likely in 2025 with a pro business and investment agenda.
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