According to a report from BCA Research, the U.S. stock market faces significant risks in the first half of 2025. The investment research firm predicts that equities could fall over 20% at some point next year, even without a recession. Doug Peta, chief U.S. investment strategist at BCA, cites several factors that could lead to a market downturn.
Consumer spending momentum is fading as the post-pandemic “revenge spending” surge loses steam. Retailers like Home Depot, Lowe’s, Walmart, and Target have reported signs of reduced spending and bargain hunting among consumers. The labor market is also showing subtle signs of weakening.
Data from the Job Openings and Labor Turnover Survey (JOLTS) reveals slowing hiring activity, with key measures like quitting and hiring rates at four-year lows. BCA strategists suggest that employers may be using return-to-office mandates to trim payrolls without severance.
U.S. stock market concerns grow
Valuations are another concern. The S&P 500 is trading at nearly 23 times forward earnings, almost two standard deviations above the historical average. Corporate bond spreads are also tight, with investment-grade and high-yield spreads near historical lows.
“Although we believe a 2025 recession is more likely than not, risk assets could disappoint even in the absence of a recession, and current prices do not augur well for future returns,” the report states. BCA recommends a defensive approach, advising investors to underweight equities. The firm acknowledges the possibility of a near-term rally extending through year-end and into January but anticipates an equity bear market to develop during the first half of 2025.
“We will be eager to narrow the underweight soon after the 20% bear-market threshold is reached and will likely look to overweight equities around -30% to -35% if they fall that much,” BCA strategists note. The report suggests that investors may be underestimating risks heading into 2025, describing the current sentiment as “too complacent.” While financial markets discount only a negligible recession probability, BCA warns that this overconfidence could lead to significant disappointments. “History is arrayed against the bulls from a macro and market valuation perspective,” the report concludes, emphasizing the vulnerability of equity markets in the current environment.
