High-Level Thoughts on Stock and Bond Markets in 2025
Stretched Sentiment Suggests Near-Term Sell-Off
Our expectation for a near-term pullback is also supported by some measures of sentiment that suggest the amount of investor optimism has gotten stretched following such a strong rally in stocks this year. One particular investor survey illustrates this point. Each month, the Conference Board issues a consumer confidence survey, a sample from approximately 3,000 households across the United States. The survey asks respondents about their optimism (or pessimism) about the stock market, among other things. In the most recent November release, the percent of consumers who expected the stock market to increase hit an all-time high at over 56%. The survey goes back to the late-1980s, so this is meaningful.
Optimism after rallies is normal, but the level of optimism reflected in this survey has raised some eyebrows and may signal an increased risk of a near-term sell-off and contribute to LPL Research’s tempered enthusiasm for stocks as 2025 approaches. However, other surveys reveal complacency more than irrational exuberance, suggesting this is not a late-1990s type environment. At least not yet.
Rich Valuations Make It Tough to Forecast P/E Multiple Expansion
Related to sentiment, elevated valuations are another reason to expect more modest stock returns in 2025, though valuations are famously not good one-year timing tools (they are good at predicting returns five years out or more). The S&P 500 equity risk premium is not much above zero even if forward-12-month estimates for earnings per share are used (higher than earnings for the prior 12 months or a last-quarter annualized run rate). Simply put, the earnings that the stock market offers investors are not covering the yield offered by long-term Treasuries, and investors are not being well-compensated for the risk they are taking in equities.
Valuations can stay high for extended periods of time, and we expect them to hold up in 2025, but looking beyond next year, if earnings growth slows it will be tougher for market participants to justify valuations.
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