Overall, 2024 has been a great year for markets, and 2025 promises to deliver more of the same. Here are my six predictions for the coming year.
The Fed will be forced to cut rates due to falling interest rates around the world, causing an international flight to U.S. Treasuries, which will drive rates lower. For example, China’s 10-year government bond yields fell below 1.7% last week, the lowest level in two decades. These low global yields will naturally cause capital flight to the U.S., and since the Fed never fights market rates, I am confident that the Fed will cut its key interest rates four times in 2025. A strong U.S. dollar will also help to reduce the prices of imported goods. The Fed’s favorite inflation indicator, the Personal Consumption Expenditure (PCE) index, rose only 0.1% in November and just 2.4% in the past 12 months, the smallest monthly increase in the PCE since May. The core PCE, which excludes food and energy, rose just 0.1% in November and 2.8% in the past 12 months. When shelter costs (owner’s equivalent rent) are stripped out, PCE inflation is running at the Fed’s 2% target rate.
One other reason the Fed should cut key interest rates four times in 2025 is that U.S. companies are now reportedly defaulting on junk loans at the fastest rate in four years. The default rate in the leverage loan market rose to 7.2% in October. Many companies have been refinancing low-yielding loans that originated during the Covid era and are increasingly struggling to pay higher interest rates.
Since banks are notorious for selling these leveraged loans to private credit firms, the possibility of a major default in the $2 trillion private credit industry is rising fast. As I have warned here in the past, a private credit default could trigger another “Black Swan” event that could freeze the private credit industry. All this could possibly be averted if the Fed aggressively cut key interest rates more in 2025.
While it is true that the 10-year Treasury bond yield rose to 4.62% last week, up from 4.17% on December 6th, incoming Treasury Security Scott Bessent should be able to manage the Treasury auctions far better than the current Treasury Secretary Janet Yellen. In the meantime, I suspect that the bond vigilantes are annoying President-elect Trump, so it will be up to incoming Treasury Security Scott Bessent to help push Treasury yields lower, with Fed rates following.
The U.S. is one of the few countries in the world that can keep growing due to better demographics. Most of the world is experiencing a population decline, except for Brazil, India, and the U.S. We still have some pro-family regions – like the South and Mountain West – so our household formation continues to grow.
Furthermore, immigrants are more quickly assimilated in the U.S. than in Europe. This also boosts household formation. Also, our 50 states are very competitive with one another. They are effectively economic laboratories that can stimulate economic growth as some of the lower-tax business-friendly states – like Florida, South Carolina, South Dakota, Tennessee, and Texas – have demonstrated.
As a result, 4-5% GDP growth is possible in the U.S. – if we can grow on “all cylinders” by 2026.
This seems unlikely now, but most economic statistics look backward, based on Biden’s policies, not forward. For instance, the Commerce Department reported last week that durable goods declined 1.1% in November due largely to a 12% decline in defense orders. Excluding transportation, durable goods orders declined by a more modest 0.1%. The good news is that non-defense capital goods orders rose by 0.7% and have risen 2.1%, so there is a “green shoot” in this report.
There is more good news: MasterCard Spending Pulse reported that holiday shopping between November 1st and December 24th, excluding auto sales, rose 3.8% vs. the same period a year ago. Consumer spending rose 3.1% during the same period a year ago, according to MasterCard. Some other details from MasterCard were that online spending rose 6.7% (vs. 6.3% a year ago) and in-store spending rose 2.9% (compared with 2.2% a year ago). Overall, it was a solid holiday shopping season in multiple categories.
Amidst all this European energy chaos, the U.S. has a major advantage, since the U.S. is the Saudi Arabia of natural gas. Specifically, the Biden ban on LNG expansion has ended, and Trump 2.0 is expected to boost LNG exports as well as utilize natural gas to double utility output to fuel AI data center demand.
Natural gas futures in Europe have soared on the fear of a lack of storage, as well as Russian LNG increasingly being blocked by new sanctions, so although natural gas prices are hyper-sensitive to cold winter weather, the U.S. still has excess supply and will have more supply to export under Trump 2.0’s “drill baby drill” policy. In fact, Trump has appointed a fracking expert, Chris Wright, to lead the Department of Energy. Furthermore, North Dakota Governor Doug Burgum has been nominated for Interior Secretary, so he can open up more federal land for crude oil and natural gas production.
Trump 2.0 is seen as a godsend for the natural gas industry. The Biden Administration’s attempt to squelch LNG expansion is over. The existing ban on drilling on federal lands is expected to be lifted by an executive Presidential order on President Trump’s first day. The EPA demand that new natural gas turbine electricity plants “sequester” carbon dioxide will also be lifted, which will cause a boom in new natural gas-fired electric plants so the U.S. can double its utility grid to meet the demand for AI data centers.
As a result of this LNG renaissance, I expect to add more mid-stream companies and some new natural gas drillers as soon as “drill baby drill” identifies the winners of this anticipated natural gas boom.
Qatar is also threatening to cut off LNG shipments to the eurozone over legislation that will penalize companies that fail to meet EU criteria on carbon emissions, plus strict human rights and labor laws. Frankly, this is a great opportunity for the U.S. to step in to fill in any void if Qatar cuts off LNG shipments to Europe. Already, Russia is exporting more LNG to the eurozone than the U.S. (since May) because the Biden Administration is striving to restrict LNG expansion due to its own environmental concerns. Frankly, the U.S. scores a lot higher than Qatar or Russia on carbon emissions, labor, and human rights, so LNG exports should rise under Trump!
And finally, last Thursday, The Wall Street Journal published a fine article on how the U.S. is expected to become increasingly dominant in LNG exports under Trump 2.0. The U.S. is already the largest LNG exporter, but we should become increasingly dominant in the upcoming years, replacing all the Russian LNG exports to Europe. The Biden Administration’s Energy Department warned recently that “unfettered exports” of natural gas would boost global emissions, but natural gas is far cleaner than coal, so it is good and “clean” to replace coal with natural gas for electricity generation in more markets around the world.
The latest backtesting of my Stock Grader and 8-factor Fundamental model confirmed that the breadth and power of the overall stock market is expanding.
Also, the S&P 500’s earnings are accelerating their gains from 8.4% in the third quarter to over 10% for the next three quarters. I am especially excited about stocks with: (1) positive analyst earnings revisions, (2) robust operating margin expansion, and (3) accelerating sales growth expected in the first half of 2025.
The market will also be fueled by the fact that M2 money supply continues to grow. Overall stock market appreciation is highly correlated to M2 money growth, which is money in checking accounts and up to 1-year deposits. There is also evidence that the “velocity of money” is increasing. When consumers are out and about (spending), the velocity of money and prosperity rises. The advent of Trump 2.0 is boosting the velocity of money since uncertainty has ended with his “drill baby drill” and other pro-business policies.
For 2025, the companies I like most will be helping to expand the utility grid and cloud computing. Later in 2025, stocks benefitting from a natural gas renaissance should become more dominant. Other than that, I wish I could tell you that 2025 is a year when you can buy ETFs in a single sector, but the truth is that this is still a market of “every stock for itself.” There are big winners in my Stock Grader system (like A-rated Nvidia) in the same sector with stocks I would sell, like D-rated Advanced Micro Devices and F-rated Intel. There are similar discrepancies in almost every sector, so stock picking remains vital in 2025.
Stocks with the best potential performance are typically characterized by (1) persistent institutional buying pressure (which creates an Alpha and lower Standard Deviation), (2) strong forecasted sales growth, (3) positive analyst earnings revisions, (4) operating margin expansion, and (5) a strong earnings surprise history.
As far as Trump’s proposed tariffs are concerned, these are not permanent tariffs, or “consumer taxes.” This is how President-elect Donald Trump negotiates, so when candidate Trump said that he intended to levy 25% tariffs on Canada and Mexico, plus boosting tariffs by 10% on China in retaliation for illegal immigration and drug trafficking, that was only designed to guilt Canada and Mexico to force them to secure their respective borders. Trump stressed that these tariffs on Canada and Mexico would remain in place “until such time as drugs, in particular Fentanyl, and illegal aliens stop this invasion of our country.”
Trump likes to fight economic wars rather than military wars by making our trading partners feel uncomfortable. He wants to negotiate from strength. As a result, I suspect that Canada and Mexico will cooperate with Trump 2.0; otherwise, the economic cost of 25% tariffs could destroy their respective economies.
China could be more problematic, but President-elect Trump has invited Chinese President Xi to his inauguration, so he clearly wants to engage in diplomatic negotiations with China. Even though Chinese President Xi is not expected to attend, Trump has sent out an important signal that he wants to mend fences with China.
As for Europe, the trade deficit with the European Union (EU) surged 8.9% in September to $13.18 billion, according to Eurostat. All the talk about tariffs hurting the U.S. is largely emanating from Europe since Germany is in a recession and the EU is scared that if they do not cut their tariffs to low U.S. levels (e.g., 2.5% on imported vehicles), then Trump 2.0 may raise tariffs to high EU levels. ECB President Christine Lagarde, who was openly hostile to Donald Trump before he was elected President, has been leading the anti-tariff crusade, despite the fact that the EU imposes larger tariffs than the U.S.
President-elect Donald Trump ran on promptly ending the war between Russia and Ukraine. Now that the third winter of this war has begun, fighting has curtailed some, despite the Biden Administration’s approval to hit Russia with longer-range missiles, install more landmines, and continue to use cluster bombs, but this winter would be a perfect time for a ceasefire and then an end to the war before its third anniversary in late February.
Ukrainian President Volodymyr Zelenskyy is seeking a peace deal with Russia, but both Britain and the U.S. asked Zelenskyy to reject any peace deal with Russia. The Biden Administration is obviously thoroughly embarrassed by this war between Russia and Ukraine. Although there are losers in most wars, both Russia and Ukraine will likely claim to be winners. Russia clearly captured more territory and Ukraine put up a much better defense than most military experts anticipated. Nonetheless, President-elect Trump will strive for Russia and Ukraine to agree to a ceasefire and to agree to a peace agreement.
The Middle East war is far more complex, with multiple national players. Syrian President Bashar al-Assad and his family fled to Russia as rebel leaders took over Syria, creating an unknown new power and questions of how these rebels will lead Syria.
The key to lasting peace in the Middle East is to expand the Abraham Accords, wherein Arab countries pledge to support Israel’s right to exist. If the new Trump Administration can convince Saudi Arabia to join the Abraham Accords, it will help promote peace in the Middle East and further isolate Iran.
The bottom line is that wars are expected to end soon, and peace is expected to prevail based on the assurance from the U.S. that all countries have the right to grow and prosper. The Trump Administration knows that wars waste an incredible amount of money, stifle economic growth, and stunt countries demographically – as Russia and Ukraine will soon discover when they notice their shortage of able-bodied young men.
China has been fairly quiet on the military front recently. They are masters at winning economic wars more than fighting military wars. Chinese President Xi has recently been purging the leadership of its military, so I do not expect that China will invade Taiwan or undertake any serious military action. If just one or both of these existing global hot spots reach a peaceful resolution in 2025, a peace dividend, similar to the end of the Cold War in 1991 can provide exceptional market gains in the years ahead.
Happy New Year, Everyone!
