My 2025 market forecast: confusion, humility and patience

Before giving you my views about where stocks are headed in 2025, a timeless, fundamental truth: Forecasting correctly requires knowing something important that other people somehow missed. That flows straight from core finance theory.

When I know something that others don’t, I ain’t shy about it. Last December, I showed you why global stocks would boom in 2024. Ditto out loud for 2023. Throughout my 50-plus-year investment career, I’ve also been wrong plenty. It hurts.

Overconfidence is poison. So, I confess: Despite trying hard, I don’t know much now that other people don’t know about how 2025 will unfold … yet. Let me explain – and detail the best approach.

Good forecasting takes three steps. First, assess possibilities. Then, look for what other forecasters miss or can’t fathom. Lastly, assign probabilities. If one possibility dominates, based on forces others don’t see, that’s the forecast.

Three stock-market outcomes seem similarly likely now. None dominate. The MSCI World Index could deliver another 20-per-cent plus one-year return. Or stocks could fall a little, maybe 7 per cent or so. Or low single-digit gains, such as 4 per cent, are similarly likely. I can only eliminate low double-digit “average” returns, which is the consensus of professional forecasters. Their consensus virtually never happens.

Whichever path global stocks take, Canada follows. The Toronto Stock Exchange is strongly correlated with world stocks, with deviations largely based on sector differences. But clarity will come soon. Market drivers, especially politics and sentiment, are in flux. I’ll show you.

The happiest scenario, up 20-plus per cent, would shock the most investors. Three straight 20-per-cent plus years is historically and legendarily rare. For the globally important S&P 500 Index, it hasn’t happened since the 1990s. Since almost no one expects it, it becomes more likely if economic and political realities slightly exceed expectations.

The sharp plunge on Dec. 18 soon after a global bull market high is majorly bullish. Since the Second World War, losses exceeded 2.5 per cent on 114 plunging days shortly after bull market highs. In the following year, however, the S&P 500 rose more than 85 per cent of the time, with average returns exceeding 20 per cent. I’ll bet no one ever told you that.

U.S. presidential inaugural years – and 2025 is another one – have been positive 60 per cent of the time. With the United States’ huge global stock market weighting and correlations, this is a big positive force. More important: Inaugural years are almost always hugely positive or just mildly negative.

Still, in 40 per cent of inaugural years, the market falls modestly. This opens the down 2025 scenario. The U.S. election results in 2024 made Republican investors over-their-skis giddily optimistic.

Stocks preprice, always – then do what few investors expect. With politics, stocks “perversely invert.” Generally, investors lean conservative, viewing Republicans as pro-business, anti-regulatory and small-government, and Democrats as the reverse. Hence, in presidential-election years when Democrats won, caution kept returns below average.

But U.S. presidents aren’t kings, and they routinely get less done than hoped or feared. In inaugural years, this creates positive surprise with Democratic presidents and, typically, above-average returns – just one minor drop since the Second World War. With Republican presidents, all but four inaugural years were negative.

Donald Trump could exceed expectations, as he did in 2017. But tiny House and Senate margins could clog Congress as Republicans bicker, which would stall legislation and breed disappointment.

The third scenario: Stocks rise slightly amid a sentiment tug of war. Sentiment is geographically barbelled: Bearish Europeans stew over tariffs, slow interest-rate cuts and 2024′s lower than U.S. stock returns. Yet a bullish cluster touts “Morning in America” and “American Exceptionalism.” These two groups may self-offset – wiggles and waggles netting to little, frustrating everyone.

So, I watch and wait for signs tilting one scenario to dominance. Maybe U.S. Senate confirmation hearings for Mr. Trump’s voluminous lesser appointees (the non-headline ones who actually make policy happen). Or the severity of Republican House bickering in January. Or how a miserable month for Prime Minister Justin Trudeau resolves, along with political chaos in Germany, France and beyond.

There is lots more outside politics to monitor. But sentiment will shift early in 2025, making one of these three scenarios dominant.

Armed with all this then – and hopefully knowing some significant thing(s) that others don’t – I’ll be back forecasting that outcome.

Meanwhile, investors who seek long-term growth need stocks. The riskiest possible move is selling out and then having stocks skyrocket. That would cost you returns that otherwise compound thereafter – impossible to recoup without taking crazy risks that could break you.

Another basic rule: If you don’t have a good reason to be bearish, always be bullish. Why? Stocks rise over two-thirds of the time – they just do. Betting against those odds rationally requires knowing something big and bad that others don’t. Even if my forecast lands on down-a-little, stay invested in case I’m wrong. After mild down years, another day always comes, with rising returns.

As index investing pioneer Jack Bogle preached, “Don’t do something. Just stand there!” When one of these scenarios gains primacy, I’ll give you a more definitive forecast and suggestions therefrom. Meanwhile: patience.

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