Investors’ exuberance for 2025 could backfire, BCA Research has warned. The firm highlighted risks such as higher inflation and slower growth stemming from overly optimistic investor sentiment. According to BCA, there are increased chances of a recession, with predictions that stocks could fall as much as 26%.
Investors are excited about another strong year for the economy and stock market, buoyed by expectations of rate cuts and a rejuvenated economy under Donald Trump’s second term. However, this optimism could paradoxically undermine growth in 2025. BCA Research suggests a defensive portfolio stance over the next 12 months due to “sky-high optimism embedded in asset prices.” Juan Correa, a global asset allocation strategist at BCA, noted that while inflation had cooled from its 2022 highs, the trend has reversed in recent months.
Consumer prices rose 2.7% year-over-year in November, up from the previous month’s 2.6%, according to the Bureau of Labor Statistics. Central bankers are cautious, with 80% of Federal Open Market Committee members foreseeing potential upside risks for core inflation. Interest rate expectations have also started trending higher, with central bankers reducing their forecasts for rate cuts to just two 25-basis-point reductions.
Cautious optimism amid potential risks
Bond yields are climbing, reaching their highest levels in nearly seven months last week. Higher bond yields could indicate that investors expect higher-for-longer interest rates and anticipate significant government stimulus if the economy continues to weaken.
However, this optimism for stimulus might backfire, tightening financial conditions as high yields weigh on economic activity. According to Moody’s, the average yield for seasoned AAA-rated corporate bonds reached a seven-month high in December. The job market has shown signs of slowing as well, with the hiring rate dropping to 3.3% in October, its lowest level in four years, based on Labor Department data.
BCA Research has issued a bearish forecast for the stock market in 2025, anticipating a potential recession. The firm previously predicted that the S&P 500 would end the year at 4,452, a 26% decline from current levels. Investor sentiment has notably cooled, with a recent survey by the American Association of Individual Investors showing that only 34% of investors are bullish on stocks over the next six months, down from 43% in early December.
While some forecasters predict a positive but muted year for the economy, BCA Research continues to advise caution amid ongoing uncertainties.
