There are a few more days to go in 2024, but unless something disastrous happens, the stock market will deliver a second consecutive year of impressive gains.
The S&P 500 is up 26%. The tech-heavy Nasdaq 100 is up about 30%. Hard to be mad about those returns, especially given those indexes returned 24% and 55% in 2023. Consider this point: $10,000 plopped into the Nasdaq 100 at the end of 2022 would be worth over $20,000 now, using a set-it, forget-it approach.
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Those are impressive returns, indeed. But gains arenāt guaranteed. And stocks have a way of disappointing the masses. Will stocks go up again in 2025? Hereās what one major economist at a $500 billion firm thinks.
Torsten Slok of Apollo Global Management recently issued his 2025 outlook for the U.S. economy and stocks.
Analyst reveals outlook for economy, stocks in 2025
Torsten Slok is a well-known economist at Apollo Global Management, an alternative investment firm with over a half billion dollars under management across real estate, hedge funds, and private equity.
Related: Veteran fund manager issues dire S&P 500 warning for 2025
Slok recently released his 2025 economic outlook for the U.S., and right now, he believes āthe U.S. economy remains strong with no signs of major slowing going into 2025.ā
He also believes interest rates will likely remain āhigher for longerā regardless of the Fedās current interest rate-cutting cycle. If Trumpās various policies are implemented (lower taxes, higher tariffs, and reduced immigration), this could lead to higher rates, help raise asset prices, and increase inflation.
He points out the U.S. economy has charted its own course in recent years, in contrast to other countries. A big part of the U.S success is the result of:
Government policies enacted coming out of Covid (which helped boost growth but have also left the U.S. with a sizable budget deficit)The fact that the U.S. economy is less sensitive to increased interest rates (due to the fact homeowners and corporations locked in low rates ahead of the last Fed rate hiking cycle) combined withThe fact that the U.S. has experienced a surge in corporate and research spending in areas like artificial intelligence, data centers, semiconductors, and manufacturing.
The U.S. economy in 2025 at 30,000 feet
Torsten Slok takes a look at the following macroeconomic drivers for 2025:
GDP Growth: GDP is likely to continue growing at a healthy level of 2.5% in 2025 versus an estimated 2.8% in 2024 and a long-term estimated growth rate of 2.0% (source: Congressional Budget Office)Inflation: Inflation has decreased significantly after peaking at over 9% in 2022. Looking ahead, Apollo believes it will take longer for inflation to get back down to the Fedās stated goal of 2.0%. In 2025, Apollo sees CPI and core CPE inflation rising by 2.4% and 2.3%, respectively.Employment: Jobs increased by a healthy 227,000 in November 2024, representing a sizable increase versus the 36,000 gainĀ the previous month. For 2025, Apollo sees the unemployment rate edging slightly higher from 4.2% today to 4.4% by year-end. Consumer Spending: In the most recent 3rd quarter, consumer spending increased at a healthy 3.7% rate. Apollo points out that the Conference Boardās Consumer Confidence Index (which looks at things like the outlook for income, business, and labor market conditions) recently rose to 92.3, which is well ahead of a reading of 80 that signals recessions. In addition, the future outlook (i.e., expectations part of the report) rose to a level of 111.7 in November versus 109.6 the prior month.Corporate Spending: Multiple stimulus-related spending programs coming out of the COVID period, along with a massive amount of capital equipment spending associated with the development and rollout of AI, have helped drive an increase in business spending in the U.S. economy over the past several quarters.
Long and variable lagsā¦.what happened this time around?
In past economic cycles, we have always been told that Federal Reserve rate hikes slow the economy and impact economic growth with ālong and variable lags.ā
Related: Veteran analyst who predicted the S&P 500’s rally unveils target for 2025
However, this time around, things truly look different.
The Federal Reserve Bank started raising short-term rates in March 2022. However, due to continued positive consumer and corporate spending trends, economic growth has generally proven to be fairly resistant and solid over the past couple of years.
What may go wrong with the markets in 2025?
There are always things to worry about. This time around, the things that could push the expansion off track include the following:
Geopolitics: Hot spots around the world, i.e., in China / Taiwan, Russia / Ukraine, and the Middle East, could lead to instability in financial markets in the year aheadInflation: If the Federal Reserve Bank lowers short-term rates too quickly, it could lead to stronger economic growth and higher inflation once again. The markets would like to see more Fed rate cuts, but Apollo disagrees and thinks the economy will do just fine in 2024 with fewer rate cuts.Budget Deficits: The large and expanding size of the U.S. deficit means that annual U.S. interest payments are likely to continue to grow ($870 billion in the latest fiscal year versus $822 billion spent on defense) and the size of federal debt (which more than doubled over the past decade) may also represent a growing source of concern for financial markets
The outlook for the U.S. consumer in 2025
The U.S. consumer has remained resilient over the past several years and has continued to help provide a positive tailwind for U.S. economic growth.
Looking back, U.S. consumer spending has positively contributed to GDP growth every quarter since the Fed first started raising rates in March 2022. Apollo looks at a number of different indicators that highlight the positive trends we have seen in consumer spending over the past couple of years.
These trends include spending at restaurants, overall retail sales, airline and hotel travel activity, spending on debit cards, and Broadway show attendance.
Apollo also highlights consumer balance sheets, pointing out that U.S. household finances remain (for the most part) in solid shape.
Looking at household debt to disposable income, this ratio peaked in 2008 and has mostly remained in a downtrend (i.e., it has been improving) since then. One area to watch, though, is spending by those in the 18-29 year old age group.
These borrowers have started to see a pick-up in auto and credit card delinquencies, and they will need to be monitored going forward.
The outlook for the stock market in 2025
Apollo sees a positive economic backdrop for 2025 but a few possible headwinds that could impact equities in the year ahead, includingĀ above-trend valuation levels, concentration in equity markets, and the financial health of small-cap stocks.
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Looking at valuation levels, Apollo points out that the S&P 500 is currently trading at a forward 12-month P/E level of about 22x.
Based on rolling 3-year historical market returns, equities are poised to generate approximately 3.0% annual returns compared to historical returns of 6.4% per year.Ā
In addition, the equity risk premium (i.e., the spread between the inverse of the P/E level and risk-free U.S. Treasury Bonds) is now negative, indicating weaker equity market returns in the future.
Next, Apollo points out that 1) there is a very high concentration in terms of the top 10 stocks in the S&P 500, and 2) these same stocks have a very high valuation compared to the rest of the S&P 500. For example, the average P/E of the top 10 stocks in the S&P 500 is currently around 50x, which is more than 2x the average of the overall S&P 500 (22x).
Lastly, Apollo sees potential headwinds for small-cap stocks in 2025. This is mainly because small-cap stocks have more floating rate debt than large-cap stocks (55% versus 24%), and with the Fed now likely to cut rates less than previously thought, this could create greater headwinds for small-cap stocks in the year ahead. Plus, the percentage of Russell 2000 small-cap stocks that are currently unprofitable is over 40% and close to the highest level dating back to 1995.
What to expect from 60/40 portfolios in 2025
For many years, financial firms have highlighted the benefits of holding 60/40 portfolios (i.e., 60% in equities and 40% in fixed income). This is largely due to the fact that 1) equities tend to rise over time (with occasional drawdowns along the way) while 2) fixed-income securities have generally appreciated in price (i.e., yields have moved lower) after former Fed Chairman Paul Volker slayed inflation in about 1980.
Today, Apollo is concerned about the future success of traditional asset allocation strategies (i.e., 60% stocks / 40% bonds). This is due to the prospect of weaker returns in both equity and fixed-income markets (which they believe is unlikely to dissipate).
Apollo has commented that private markets may offer an alternative to traditional public equity and fixed-income markets that can enhance investor returns and help generate ālong-term alpha generation.ā As a result, Apollo believes that adding some private market exposure to 60 / 40 equity / fixed income portfolios would likely make sense in the period ahead.Ā
Related: Veteran fund manager issues dire S&P 500 warning for 2025
