My Five Predictions for 2025 - and One Way to Profit From What's Coming Dear Leah, Every year, I’m asked to provide my “predictions” for the New Year. With the New Year now less than two weeks away, today is a perfect day to do that. So, without further ado, here are my five predictions for 2025. Prediction No. 1: Global Central Banks Set to Continue to Cut Key Interest Rates The European Central Bank (ECB) kicked off the December rate cuts last week, slashing its key interest rate by 0.25% for the fourth time this year. The reality is that the European economy is floundering, and the ECB only expects 1.1% annual GDP growth this year. That’s down from previous estimates of 1.3%. So, the ECB will need to continue loosening its monetary policy with more rate cuts in 2025 to protect economic growth in the European Union. A Bloomberg survey anticipates that the ECB will cut its key interest rate to 2% by June 2025. Key interest rates currently stand at 3%. So, if the ECB continues to cut rates by 0.25%, then four more rate cuts may be forthcoming. This is good news for the U.S. The fact is that a decline in European interest rates should trigger a big rally in U.S. Treasuries. This will, in turn, bring interest rates lower and encourage the Federal Reserve also to cut key interest rates. Remember, the Fed never fights market rates. The one problem, though, is inflation. Recent data reports showed that inflation on both the consumer and wholesale levels ticked up in November. As we discussed in Thursday’s Market 360, this week’s Federal Open Market Committee (FOMC) statement and updated “dot plot” both signaled that the Fed was renewing its focus on inflation and shifting away from unemployment. Prediction No. 2: U.S. Remains Economic Growth Engine Global economic growth has tapped the brakes, especially with the recent chaos in Europe. To review, the two largest economies in Europe – Germany and France – are both on the verge of a recession, given a slowdown in manufacturing and services, as well as political unrest. Germany has an election scheduled for February, with a new chancellor anticipated. French President Macron’s party has a minority in Parliament and continues to be undermined by Marine Le Pen’s National Rally Party. If the chaos in Europe persists, don’t be surprised if the euro “breaks a buck” and reaches parity with the U.S. dollar. The ECB’s key interest rate cuts will also further undermine the euro in 2025.
The good news is that we don’t have political chaos or recession fears in the U.S. – and as a result, I suspect the U.S. will remain the economic growth engine of the world. There are a few key reasons why the U.S. economy continues to expand… - Better Demographics: Much of the world has experienced a population decline, except for the U.S., Brazil and India. The U.S. still has pro-family regions, like the South and Mountain West, so household formation continues to grow.
- Quick Immigrant Assimilation: The U.S. assimilates its immigrants more effectively, both legal and illegal, which also helps boost household formation.
- Competitive States: The U.S.’s 50 states are very competitive with each other and are effectively economic laboratories that can also stimulate economic growth. Florida, South Carolina, South Dakota, Tennessee and Texas have all demonstrated this.
Now, it’s also important to note that one of Trump 2.0’s first agenda items is to end the manufacturing recession in the U.S. You may recall that manufacturing has been in a recession for 24 of the past 25 months, according to the Institute of Supply Management (ISM). Once the manufacturing sector starts to grow again, 4% annual GDP growth is possible. Another agenda item is to end the senseless wars in the Middle East and between Russia and Ukraine. If Trump 2.0 can do this, the world would benefit from a “peace dividend” like the one experienced when Bill Clinton was president. And if there is peace in the world, then 5% annual GDP growth is possible. Overall, if the U.S. is firing on all cylinders in 2025, then 4% to 5% annual GDP growth is a very real possibility. Prediction No. 3: Trump 2.0 Should Boost the Oil & Gas Industry Trump 2.0 is simply a “godsend” for the natural gas industry. When Trump takes office in January, the existing ban on federal lands is expected to be lifted by an executive order on his first day back in office. The Biden administration’s attempt to squelch liquified natural gas (LNG) expansion will be over. The U.S. Environmental Protection Agency’s (EPA) demand that all new natural gas turbine electricity plants “sequester” carbon dioxide will also be lifted, and that will cause a boom in new natural gas-fired electric plants. So, the U.S. will now be able to double its utility grid to better meet the rising demand for artificial intelligence data centers. With the resurgence in the natural gas industry, we will likely add more midstream companies and some new natural gas drillers to the Buy Lists. But we won’t make these additions until Trump 2.0’s “drill, baby, drill” identifies the biggest winners. Regarding oil, production should also increase under Trump 2.0. However, weak global demand due to sputtering economies in Europe and Asia will likely keep oil prices in check next year. I expect crude oil prices to range from $58 per barrel to $80 per barrel in 2025. Prediction No. 4: Earnings Set to Hit the Gas The overall earnings environment improved immensely in 2024, but 2025 will be even better. The fact is earnings momentum is anticipated to hit the gas in the New Year. Currently, FactSet projects that the S&P 500 will achieve fourth-quarter earnings of 11.8% on average and full-year 2024 earnings of 9.5% on average. And after that, earnings growth is expected to surge. The S&P 500 is expected to achieve 15% average earnings growth in 2025, with earnings momentum in each quarter of fiscal year 2025 set to exceed the S&P 500’s average earnings growth in all of 2024. So, we remain in a fundamentally focused stock market, and I’m especially excited about stocks with positive analyst earnings revisions, robust operating margin expansion and accelerating earnings and sales momentum. Prediction No. 5: The Third Stage of the AI Revolution Begins The first stage of AI development was all about model training. Companies like OpenAI needed to gather billions of data points and then run it all through increasingly large systems to create working large language models (LLMs). Model sizes have historically grown at an exponential rate to overcome diminishing rates of performance, and every LLM developer has been locked in an arms race to create the most data-intensive model. That’s why companies like NVIDIA Corporation (NVDA) and Super Micro Computer Inc. (SMCI) – firms that specialize in providing the top-of-the-line computing power needed to train these ever-growing models. The second stage of the AI Revolution is software-focused firms using AI and/or delving into quantum computing to create remarkable innovations. These are the companies that push the envelope of what’s possible and upending their businesses along the way. The third stage of the AI Revolution is where we learn to work with LLMs… where we seek alternative methods to push AI further… and where the future pace of development will depend on human-and-machine ingenuity. The winners here will be the AI Appliers, the companies smart enough to apply imperfect AI technologies to an equally imperfect world. These are the firms that recognize AI’s limitations and create innovative solutions to overcome them. I expect the third stage will begin in 2025 – and my InvestorPlace colleagues Luke Lango and Eric Fry agree. It’s why we decided to team up and create a new portfolio of seven stocks that we believe will lead this next stage of AI development. These AI Appliers are… - Working around the limitations of LLMs – using a clever combination of human ingenuity and software to supplement AI shortcomings.
- Exploring the next generation of AI technologies where silicon chips meet bioengineering.
- And helping the world redefine what is possible in a world of artificial intelligence.
We also believe these firms will help investors prepare financially for a world increasingly dominated by computers that are smarter than the average person (though still far from perfect). To learn more about our AI Appliers portfolio and how to access it, watch our broadcast here. Sincerely, | .png)
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