As Thanksgiving ushers in a quiet trading day for US markets, analysts are turning their attention to the prospects for 2025.
The S&P 500 has outpaced global indices this year, climbing more than 25%, far outstripping the FTSE 100's 7% gain and the Eurostoxx 50's 5% rise.
The index’s stellar performance this year is leaving investors optimistic about its future. Kathleen Brooks, research director at XTB, believes that US stock market outperformance is expected to persist, even as economic conditions evolve.
According to Brooks, the trend may continue into next year, supported by earnings per share (EPS) growth forecasts of over 10% for the S&P 500 over the next 12 months.
In contrast, EPS growth for the FTSE 100 is expected to be 3.5%, while the Eurostoxx 50 faces an anemic growth forecast of less than 1%.
The disparity in growth expectations is stark and reflects broader macroeconomic conditions. "UK and European companies are grappling with the potential impacts of trade tariffs and political uncertainty, which could revise their earnings estimates lower," Brooks noted.
Fed's rate strategy buoys optimism
The Federal Reserve's approach to interest rates also plays a critical role in market sentiment. Brooks highlighted growing market optimism about further rate cuts, with a 70% probability of a December rate cut, up from 55% just a week ago.
While the Fed's recent policy signals suggest a gradual path to rate reductions, expectations include two more cuts in 2025, reinforcing a supportive environment for US equities.
Despite a rise in Personal Consumption Expenditures (PCE) inflation in October, Brooks said the uptick is unlikely to derail the Fed’s strategy. This dovish stance on rates contrasts with the challenges faced by other economies, bolstering the relative appeal of US markets.
Valuation concerns
One caveat to the S&P 500’s dominance is valuation. Brooks points out that US stocks are "very expensive," with better bargains available in European and UK indices. However, the significant growth gap between US and international markets may limit the allure of switching investments away from American equities.
"Unless there is a big earnings disappointment in the coming months, the US is likely to enter 2025 in a strong position," Brooks wrote.
For investors, the challenge will be balancing the S&P 500's high valuations with its robust growth prospects. As Brooks suggests, barring unforeseen setbacks, US markets are well-positioned to maintain their lead over international peers, underpinned by strong corporate performance and a favorable monetary policy environment.
“US stocks are very expensive and there are definitely bigger bargains to be had in the UK and Europe, however, when growth expectations are so much higher in the US compared to this side of the Atlantic, it may not entice a wave of investors to ditch US stocks in favour of UK or European indices,” Brooks wrote.
“Unless there is a big earnings disappointment in the coming months, the US is likely to enter 2025 in a strong position.”