The S&P 500 will soar another 26% by the end of next year as the Federal Reserve cuts interest rates more than expected, research firms say

Reuters/Brendan McDermid

  • Capital Economics says stocks will rise by the end of next year.

  • Any sustained equity bubble is well below the levels of 1929 and 2000, suggesting there is further upside ahead.

  • At the same time, the company said in a recent report that the Federal Reserve may cut interest rates more deeply than investors expect.

Capital Economics says the S&P 500 will continue to soar until at least 2026 as the stock market rally is not over and the Federal Reserve will cut interest rates far more than expected.

Economists at the research firm predict the S&P 500 will soar to 6,500 by the end of 2025, which would represent a 26% gain from current levels.

This is contrary to what more pessimistic commentators are saying, with some market experts warning that Upcoming inventory adjustments Because the S&P 500 reflects other historical bubbles.

But the stock doesn’t look like As overvalued as in previous periodsCapital Economics said Shiller’s S&P 500 excess CAPE return, which shows the valuation of stocks relative to bonds, still hasn’t reached 2017 levels. 1929 and dotcom bubblesuggesting the stock market could be headed for a “significant rise.”

“As stock market bubbles continue to inflate, we expect ‘risky’ assets, especially equities, to continue to outperform ‘safe’ assets in the coming years,” economists said in a note Thursday.

On the other hand, the Fed is expected to cut interest rates soon—and the likelihood of one is high Operational depth exceeded market expectationsThe company said the Federal Reserve may issue its First interest rate cut in JuneThe firm estimates it will eventually cut interest rates by 200 basis points by mid-2025, a steeper cut than what the market is already pricing in.

The economists added: “With the economy holding up well, there’s a chance they’ll remain on hold until July. Still, we expect a rate cut that will outpace investors.”

Markets have been waiting for a rate cut for more than a year, as lower rates would loosen financial conditions and potentially boost risk assets such as stocks. Federal Reserve officials expect to cut interest rates by 75 basis points in 2024. Meanwhile, investors are pricing in 65 basis points. There is a % chance that the first rate cut could come in June, according to the agency CME FedWatch Tool.

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