Jeremy Siegel, Wharton emeritus professor and senior economist at WisdomTree, anticipates positive momentum for financial markets heading into the next year, emphasizing that the Federal Reserve appears poised for a soft economic landing. He predicts that the Fed will implement four additional rate hikes in its next six meetings. This outlook coincides with an impressive year for the benchmark S&P 500 index, which has increased by over 23%, driven largely by the Fed’s proactive rate cuts in September. Over the past two years, this index has almost doubled in value due to strong economic indicators and robust corporate earning reports.
Siegel notes that while the past two years have seen stock market returns significantly exceed historical averages, it’s essential that investors guard against assuming this performance is the new standard. He asserts that he sees no imminent slowdown and believes that market momentum will persist into the next year. His projections indicate that the S&P 500 could achieve a more normalized gain of between 7.5% and 8% by 2025, factoring in a 2% inflation rate. He emphasizes that this outlook is contingent on the continued resilience of the economy.
According to Siegel, the Federal Reserve’s commitment to proactive measures signals a lower likelihood of recession. He highlights that since September 12, when the Fed indicated it would respond decisively to any signs of economic weakening, the chances of a downturn have diminished. He forecasts the potential for additional cuts amounting to 100 basis points by June of 2025, although he warns that any significant weakness in the labor market might prompt the Fed to take more aggressive action. His expectations suggest a ceiling for rate increases of no more than 25 basis points at each meeting.
In his remarks to a gathering of top financial advisors, Siegel highlighted the rebounding growth of money supply, perceiving it as a positive signal for the economy. He notes this growth trend, while not entirely conclusive, reflects an increase in loan activity and consumer confidence. This backdrop, he argues, contributes to an optimistic outlook for a soft landing, particularly with the Fed’s assurance of acting decisively when economic weakness appears.
Siegel remains cautious regarding rates, predicting that while short-term easing is underway, long-term rates will remain elevated. By mid-2025, he anticipates the Fed funds rate will stabilize at around 3.5%, while the 10-year bond yield could approach 4.5%. He encourages investors to maintain positions in equities, labeling them as essential assets and effective hedges against inflation. Although he sees the S&P 500 index as potentially overvalued, he points out that many stocks outside the mega-cap tech sector are reasonably valued and suggestive of solid investment opportunities.
Despite his optimistic predictions, Siegel warns investors to be wary of the risk of a bubble in private market investments. He posits that while private equity and private credit are being treated as undervalued asset classes, a recession could lead to substantial defaults within these sectors. While he maintains a cautiously optimistic stance, he acknowledges the inevitability of bear markets, reminding investors that historically, selling during economic downturns has not proven to be a sound strategy.