From Canary Wharf to Wall Street, analysts spew year-end FTSE and S&P 500 price targets with long explanatory screeds. For 53 years I’ve watched this annual ritual, which always results in a consensus that is utterly marvellous at showing what won’t happen.
It is also why my forecast will shock you. World markets will boom again through 2025, led by Europe. Let me explain.
Each December, my firm rounds up myriad professional forecasts. Most are for the S&P 500, so I first assess consensus views of the US – comprising over 70pc of global market capitalisation – to see what their markets have pre-priced, and therefore which outcomes I can rule out.
Then I compare sentiment in Britain, the EU, Japan and elsewhere. If sentiment is too cold, stocks probably beat consensus forecasts, and if Americans are happiest, non-US stocks probably lead.
The US market outlooks from professionals for 2025 cluster between 7pc and 15pc. So, that won’t happen, eliminating an average-ish year (which rarely happens). But it left minor declines, slight gains and another big year on the table.
Sentiment was in flux after the election – measuring it was tricky but convinced me of a hugely positive 2025, the least expected outcome.
Of 62 professional S&P 500 forecasts, only two predict growth in excess of 20pc (one of these is a January upward revision). The S&P 500 hasn’t logged three straight years over 20pc since the late 1990s, and surprise power makes that now likelier.
Also, US stocks have risen in 60pc of presidential inaugural years over the last century. When up, such years are usually huge. With business fundamentals healthy, US earnings will climb.
High correlations and America’s huge footprint pushes this positivity worldwide. Yes, including Britain. The FTSE All Share has risen in 72pc of US presidential inaugural years since 1925 – 11 of these 18 positive years topped 20pc.
But the biggest swing factor? It was sentiment. Since November’s vote, US investors’ optimism leapt as allegedly “pro-business” Republicans took the White House and Congress. Yet Europeans plummeted into deeper pessimism – excessively so.
Hence, even moderate non-US GDP growth, particularly European, would bring a huge positive surprise.
This sentiment effect is bigger than you think. Decades ago, behaviouralists proved American investors hate losses two and a half times as much as they love equivalent gains.
Relatedly, with my former research partner, Meir Statman, I found that British and German investors hate losses much more – perhaps four- or six-to-one. No judgement, but Europeans are just more risk averse than Americans. Fear builds the legendary “wall of worry” stocks love to climb.
Fear of President Donald Trump pervades Europeans. They are tariff-fied! You don’t need me to tell you that the Bank of England’s gloomy new forecast and Rachel Reeves’s impending hike to National Insurance employer contributions fuel stagflation dread.
Local political chaos and faltering German and French growth compound eurozone gloom. Pessimism invites positive surprise, also known as relief.
Take tariffs. They may never happen. Remember Trump’s first-term threats against EU auto exports? Or what he just did with Columbia, Mexico and Canada?
Like many others, tariff threats were bargaining chips aimed at inking deals. Trump already downplays UK tariffs, touting trade deal prospects. That could improve market access for UK services exports, a win few consider.
And if tariffs come? Only 15pc of UK goods exports and 16pc of the EU’s go to the US. If tariffs aren’t universal, Trump’s first term proved these are mostly easily dodged via brokering through another country.
Europe sees itself as a no-growth quagmire, dogged by “sick man” Germany. Even minor growth will positively surprise, as in 2024. The Bank of England’s downgraded forecast also illustrates positive surprise potential.
Coupled with Europe’s leadership, value stocks (more economically sensitive and featuring cheaper valuations), should outshine growth for the first sustained time in years. Why?
The US and growth stocks are inherently intertwined. Growth heavyweight sectors tech and communication services total over 40pc of US market cap, but almost none of Europe’s. So, whenever growth stocks trail, seen in the Nasdaq lagging the S&P 500, US stocks lag value-heavy Europe. Like they do now.
Through February 5, MSCI’s Europe Index is up 7.1pc, leading the S&P 500’s 3.2pc, which leads the Nasdaq’s 2pc (all in pounds).
Few see it, giving it staying power. Better still, those who see it dismiss it.
New FTSE highs? Poisoned fruit of the weak pound boosting export revenues, headlines moan. Britain beating expectations and benefitting from value’s resurgence? Unfathomable! Ditto for new Dutch, German and Swedish all-time highs.
