Credit: Close-up of the street sign for Wall Street — Andrew Kelly - Reuters / stock.adobe.com
I write an article of bold predictions each year, with my thoughts on where the stock market, economy, interest rates, and more are heading. And they are meant to be "bold" predictions, which I define as those that are contrary to the expectations of the majority of analysts and Wall Street experts.
Before we dive into this year's predictions, it's important to keep myself honest. Along with each year's version, I like to hold myself accountable by looking back at the predictions I made a year ago and how they panned out. So, these were my five bold predictions for 2024:
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- The stock market will have a strong year. At the beginning of 2024, the median analyst prediction was for an 8% gain in the S&P 500. It is up 28% through Dec. 26, so it's safe to call this one a win.
- Small-caps and value stocks will outperform. I was wrong here, as I underestimated how well big tech would do thanks to the AI revolution. The Russell 2000 small-cap index underperformed the S&P 500 by 15 percentage points.
- Mortgage rates will plunge into the 5% range. This came close to happening at one point, with the average 30-year rate around 6.1% just before the Fed started cutting rates. But the 5% zone didn't end up happening.
- Home prices will increase by a "mid-single-digit" percentage. Zillow (NASDAQ: ZG)(NASDAQ: Z) was calling for home prices to fall slightly in 2024. They ended up rising by nearly 3%. I'd call this an accurate prediction.
- The Fed will cut rates eight times. This ended up being too bold. The Federal Reserve started cutting rates in September and has done so at every meeting since then, but I figured the cuts would start earlier in the year.
Last year, I was two out of five. Not my best result. The most accurate result I've had was going 4-of-5 with bold predictions in 2022. But keep in mind that these are meant to be bold predictions, which are by definition not terribly likely to happen.
It's also worth noting that I don't necessarily think the other three will end up being wrong, but that they have a delayed fuse thanks to the Fed's late start with rate cutting. And that brings me to my bold predictions for 2025.
5 Bold predictions for 2025
Without further delay, here are five things I think have a better chance of happening in 2025 than many experts seem to think:
- We'll get a full percentage point of rate cuts. After the latest Fed meeting, expectations for interest rate cuts in 2025 became far more muted. In fact, the median expectation is for a single 25-basis-point rate cut between now and the end of 2025, according to the CME FedWatch tool. However, I believe that a combination of tame inflation data and economic uncertainty will lead to faster-than-expected cuts. The FedWatch tool only has a 2.7% chance of a full percentage point of rate cuts in 2025, but that's exactly what I think will happen.
- Small cap stocks will finally outperform the S&P 500. At the beginning of 2024, small caps were trading at their lowest price-to-book valuations relative to large caps in a quarter century. And during 2025, the gap widened. If my rate cut prediction proves to be accurate, and/or the economy is stronger than many expect it will be, it could create an excellent environment for small-cap outperformance.
- Real estate will be the best-performing S&P sector in 2025. This goes hand in hand with the interest rate prediction. Real estate investment trusts, or REITs, are highly rate-sensitive stocks, and should benefit tremendously if the Fed is more aggressive with rate cuts than expected.
- The S&P 500 will have a so-so year. Many of the top analysts see a double-digit gain in the S&P 500 in 2025, but I disagree. I think we'll see a single-digit (say 4%-8%) gain in the benchmark index. While I think we'll see many stocks and indices perform well, I think the mega-cap tech stocks will underperform after an incredible run in 2023 and 2024, and keep the overall S&P 500 muted.
- Speculative stocks will rule the market. To be clear, I'm not calling for the "SPAC Boom: Part 2" or anything like that, but I do see the general appetite for speculation coming back. We're already seeing some of the biggest winners of the 2021 era roaring back to life, such as Upstart (NASDAQ: UPST) and Lemonade (NYSE: LMND), both of which are much stronger businesses now.
I don't expect to be 5-for-5
As mentioned, these are intended to be bold predictions. I'm fairly certain they won't all be correct. But these are things that (in my educated opinion) have a better-than-expected chance of happening this year.
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Matt Frankel has positions in Lemonade and Upstart and has the following options: short December 2025 $95 calls on Upstart. The Motley Fool has positions in and recommends Lemonade, Upstart, and Zillow Group. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
