It is a time when financial strategists and economic experts forecast what will happen in the coming year. Since most of Wall Street is trying to sell you something, prepare for a positive outlook from most firms.

 

On practically the same date last year, I wrote that strategists were predicting the 2024 S&P 500 Index targets ranged from 4,200 to 5,500. Given that over a long period, the S&P 500 has delivered around 10.13 percent yearly returns since 1957, and 9.19 percent over the last 150 years, forecasts that mimic those returns should be ignored.

 

Those forecasts told me the authors had no idea where the market was going.  As such, they just took the historical average gain as their forecast, and very few were bearish for 2024. 

 

Overall, Wall Street did get the direction right, but the S&P 500 Index gained more than double their best forecasts. Most forecasters also expected the dollar to continue to decline, and interest rates as well. Neither happened. Given the track record, I would also take 2025's forecasts with a grain of salt. 

 

This year, the target range for the S&P 500 ranges from 6,400 to 7,007. This implies a return between plus-5 percent and plus-15 percent. The average of those two extremes is of course 10 percent. Need I say more? Unlike others, I usually refrain from forecasting where the S&P 500 will end up 12 months from now. There are just too many factors that can change my outlook along the way. So instead, I will focus on the risks and rewards I see for the markets.

 

Inflation is one of my chief concerns. I expect the inflation rate to hit 2.9 percent next month and climb higher into the summer. That means to me that the markets should not expect the Fed to cut interest rates again for quite some time. That removes one major support for the markets.

 

I do expect the economy to continue to grow but at a slower pace. As such, corporate earnings should grow along with the economy. In that environment, I do think that small-cap stocks will finally have their day in the sun. That is not a unique position. Most analysts in the financial community are recommending small-cap outperformance as well.

 

On the political front, Donald Trump will be inheriting a strong economy, a robust employment picture, a strong dollar, reasonable interest rates, and a flattening inflation rate from the Biden Administration. It is his to build upon or to squander. He will also face a historical debt burden that he will be forced to confront at some point.

 

The prevailing sentiment among investors is that the incoming president will benefit the economy due to his stance on deregulation, efficiency, lower taxes, and lower interest rates. Despite his promise to levy blanket tariffs on the world, most U.S. traders believe that his threats are at most a negotiating tactic.

 

I hope so. The rest of the world doesn't think that will be the case. Going into 2025, several major nations have already watched their currencies fall 8-9 percent against the dollar. That indicates to me that they think the tariff threats will be real and will bite, at least in the short term.

 

I would expect that if the dollar does continue its climb in a tariff war, then Bitcoin, and possibly gold and other precious metals, will do so as well.  That does not mean that cryptocurrencies will go straight up from here. I am looking for a deep Bitcoin pullback to the $86,000 to $74,000 range first.

 

As for the market's overall performance, it would be rare to have another year like the last two years. That doesn't necessarily mean markets would be down, but a less robust performance would not surprise me. Equities usually have a period of consolidation beginning in the last part of January.  I would watch out for that.

 

In addition, in populist periods in the past, stock market performance between presidential election years has been dismal at least in the Sixties into the Eighties. However, right now, the Santa Claus rally is once again in play.

 

The end-of-year flow of funds into equities is alive and well and should continue to support the market at least into January. During this period, Santa has delivered to the market a 1.3 percent gain on average since 1950. Happy New Year.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.