It's getting to the time of the year when large brokers and banks share their thoughts on what we can expect from the markets in the year ahead. A process that’s given some added spice this year, by the fact that 2025 will see the start of Donald Trump’s second term as US President.
Mr Trump was as unconventional, as he was unpredictable in his first term. And though he is older, wiser and more familiar with the workings of Washington D.C. now, there are sure to be some curveballs in 2025.
Two banks have written on the prospects for equities this week.
JP Morgan has published another Equity Strategy note, and Goldman Sachs equity strategy team has delivered its look ahead to 2025 as whole.
Both banks exercise a degree of caution.
JP Morgan believes that European and Emerging market equities will struggle given the US election result and the uncertainty around tariffs.
They see low GDP growth rates in Europe (<1.0%) and think that the consensus forecast for 8.0% growth in Eurozone EPS (Earnings Per Share) is now under threat.
For its part Goldman’s strategists argued that 2024 was an exceptional year with one of the strongest rises in the S&P 500 since 1928. They also highlight, and breakdown where those gains have come from.
As we can see below almost 50% of equity returns have been driven by expanding valuations which means that investors are effectively “paying more to own less” or if you prefer they are betting on future growth in earnings and revenues.
Something Goldmans attributes to market optimism over lower interest rates. Some of that optimism now looks misplaced to me.
EPS growth has made a significant contribution this year, particularly in the US, which we can see in the light blue portions of the column chart below.
Source: Goldman Sachs Research
However, JP Morgan points out that in its view earnings have not fully recovered in Q3 and that earnings per share, and anticipated growth rates are ”softer” than they were three months ago.
Goldman is slightly more upbeat, forecasting total returns from equities, in US$ terms, of 10.0% in 2025. However, it also reminds traders that stocks have risen by approximately +40.0% in the last 13 months.
Gains that leave equities vulnerable to disappointment.
Enter the DAX
Despite well documented problems in Germany's domestic economy the DAX has performed well over the last year, rising by more than +20.0%.
Source: Trading Economics
And there are plenty of stocks within the index that have matched or beaten those returns.
Source: Trading Economics
That's not to say that there aren't underperformers in the German blue chip index because there are many.
Among the worst examples is Speciality and Agri-chemicals group Bayer AG, which are lower by almost 38.0% in the last year.
Source: Barchart.com
As traders we shouldn’t slavishly follow what the big banks and brokers say, after all they have their own axes to grind, at the same time we shouldn't discount their comments either.
What I like to do is to try and find clues in the markets to verify or even disprove what the banks are saying.
So what might the vulnerabilities of European equities be going forward?
Well the introduction of substantial tariffs in the US on European goods and services probably wouldn’t be good news for the export heavy DAX.
However, looking at the performance of the STOXX Auto sector, compared to the Euro STOXX 50 over the last year, see the chart below. You wonder how much of that has already been priced in.
Source: Investors Intelligence
One factor that might also have a bearing on the performance of German equities are rising energy costs. Oil prices may have fallen in recent weeks but that hasn't translated into lower energy prices in Germany.
TTF natural gas has risen by more than +16.0% over the last month whilst German power or electricity prices have risen by +53.0% over that time frame.
Of course the prices of both gas and power are still well below the peaks seen after the Russian invasion of Ukraine but they are rising and that's worrying as we enter the coldest part of the year.
Germany is also facing the prospect of a snap general election after the recent collapse of its ruling coalition.
If Donald Trump can broker a peace deal between Russia and the Ukraine then that could be positive for European stocks and Germany in particular.
However, there would be a certain amount of irony if President Trump provided a positive catalyst through peace negotiations, only to snatch the momentum away through a much tougher trade policy with Europe.
One thing seems certain and that is there should be plenty for traders to get their teeth into European markets, even in the early part of 2025.
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