In the pre-pandemic era, U.S. economic forecasts were often overly optimistic. However, post-pandemic, the trend has shifted to underestimations, as highlighted by Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, as quoted on Yahoo Finance.
But things have turned around for the positive lately. Heading into 2025, strategists like Calvasina are betting that consensus economic forecasts will once again be beaten by the upside of the U.S. economy.
Inside the GDP Growth Forecast
RBC Capital Markets expects 2% to 3% U.S. economic growth in 2025. Bank of America's equity and quantitative strategy team projects the U.S. economy to grow at an annualized rate of 2.4% in 2025, higher than the Bloomberg consensus forecast of 2.1% growth.
Value Sectors to Win?
BofA’s Savita Subramanian emphasizes opportunities in stocks with strong cash return prospects and ties to the U.S. economy, particularly large-cap value stocks. Calvasina echoes this view, noting that value stocks tend to outperform in periods of stronger GDP growth.
Historical Context and Economic Implications
Deutsche Bank’s Bankim Chadha, who projects the S&P 500 at 7,000 for 2025, highlights the significance of the “historically strong economic backdrop,” marked by low unemployment and robust GDP growth. This combination has been witnessed in just 6% of historical instances. In fact, this combination was reflected in strong equity market performances during the 1960s and the second half of the 1990s, as quoted on Yahoo Finance.
GDP Growth and Stock Market Performance
Calvasina's work indicated that historical data (dating back to 1947) reveals the importance of economic growth to stock market outcomes:
1. When GDP growth ranged between 1.1% and 2% (five times historically), stocks rose only 40% of the time, with an average decline of 3.4%.
2. When GDP growth ranged between 2.1% and 3%, stocks gained 70% of the time, with an average return of nearly 11%.
Why Value Stocks?
The second Trump era and protectionist policies may drive inflation higher in 2025. This, in turn, is likely to keep bond yields higher. Value stocks have strong current cash flows that are more likely to grow slowly or diminish over time. Therefore, when valuing stocks using the discounted cash flow method, in times of higher interest rates, value stocks are less negatively impacted than growth stocks.
Value ETFs in Focus
Against this backdrop, below, we have highlighted a few value-based exchange-traded funds (ETFs) that could be up for gains in 2025. These ETFs have a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy). These ETFs have a lower price/earnings (P/E) ratio (36 months) than iShares Core S&P 500 ETF IVV (29.59X).
However, these ETFs have underperformed IVV in the year-to-date (YTD) frame (up 28.23%). These value ETFs may turn around next year.
Invesco S&P 500 Enhanced Value ETF SPVU – P/E: 11.76X; YTD Performance: 22.90%; Up 7.7% past month (as of Dec. 4, 2024)
SPDR Portfolio S&P 500 High Dividend ETF SPYD – P/E: 16.60X; YTD Performance: 21.83%; Up 3.7% past month; Yields 3.99% annually
Vanguard Russell 1000 Value ETF VONV – P/E: 20.00X; YTD Performance: 21.08%%; Up 5.3% past month
Vanguard Mid-Cap Value ETF VOE – P/E: 18.90X; YTD Performance: 21.74%; Up 5.3% past month
Vanguard Small-Cap Value ETF VBR – P/E: 16.00X; YTD Performance: 20.69%; Up 7.5% past month
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Vanguard Russell 1000 Value ETF (VONV): ETF Research Reports
Vanguard Small-Cap Value ETF (VBR): ETF Research Reports
SPDR Portfolio S&P 500 High Dividend ETF (SPYD): ETF Research Reports
iShares Core S&P 500 ETF (IVV): ETF Research Reports
Vanguard Mid-Cap Value ETF (VOE): ETF Research Reports
Invesco S&P 500 Enhanced Value ETF (SPVU): ETF Research Reports
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
