Investing.com -- Stifel strategists expect that the S&P 500 will peak in the first half of 2025 before falling significantly in the latter half of the year, pressured by slower GDP growth and persistent inflation.
Stifel's team, led by Barry Bannister, projects U.S. real GDP to decelerate to approximately 1.5% in the second half of 2025, compared to recent growth rates above 3%. The slowdown is anticipated to happen “as lower real wages pressure consumption growth, while fixed investment and net exports also weaken.”
Simultaneously, core PCE inflation is expected to remain "just under 3%,” compared to the Federal Reserve’s 2% goal.
These factors, strategists caution, could contribute to a 10-15% correction in the S&P 500 by the second half of 2025.
Stifel also points out valuations in the equity market as another critical factor. The S&P 500 is currently deemed 12% overvalued, with its price-to-earnings (P/E) ratio near levels last seen during the late-1990s technology bubble.
The firm also notes that “Growth vs. Value are at extremes,” with Growth outperforming Value at a “3-generation high” not seen since 1939. Historically, such extremes have often preceded corrections.
The report draws historical parallels, comparing the current period to market cycles in 1932-1939, 1945-1952, and 1967-1974. These cycles similarly involved inflationary pressures and subsequent market pullbacks.
“Every generation has a bubble mentality (inflation-adjusted S&P 500 peaks 1929, 1968, 2000), this being ours,” Stifel emphasized.
The Federal Reserve’s monetary policy adds further uncertainty. Stifel expects the Fed to “pause at the Jan-29th meeting at 4% (2 more cuts, then done well into 2H25)” but warns that its inflation concerns could lead to “standing pat too long in 2H25 despite GDP slowing.”
Furthermore, potential policy shifts under the incoming administration could heighten volatility in early 2025, as the new leadership seeks to “cement its agenda” within a limited window.
Against this backdrop, Stifel recommends focusing on defensive sectors such as healthcare, utilities, and staples, which are more resilient during economic downturns. “The environment does not appear conducive to continued equity mania,” the note cautions.