The past two years have been marked by significant valuation multiple expansion in the equity markets, overshadowing actual earnings growth. The S&P 500 experienced a substantial rise of 68%, while earnings only grew by 12%. This situation has led to a trailing price-to-earnings multiple increase from 16.4x during the market trough in October 2022 to 24.7x currently.
While these valuations appear stretched, they could potentially become more so if consensus earnings growth predictions of 14.6% for 2025 are realized. Historically, equity markets continue their trajectory until a significant correction or recession prompts a downturn, although the likelihood of such an economic event in 2025 is considered low.
Analysts suggest that the bull market may persist, with key indicators like market breadth and investor sentiment showing signs of deterioration but still maintaining overall health throughout most of 2024. A cautious approach is advised as "watchful, cautious, but invested" remains the guiding principle.
Looking beyond 2025, several long-term trends are anticipated to shape investment portfolios. These include technological advancements across various sectors and shifts in energy dynamics towards renewable sources due to cost advantages.
In the United States, potential volatility could arise from pro-growth tax policies alongside aggressive tariff measures not seen in nearly a century. The Federal Reserve's ongoing rate-cut cycle is expected to pause at approximately 4.25%, with future adjustments contingent on economic developments under President Trump's administration.
Canada faces economic challenges such as reduced productivity growth and immigration targets along with potential tariffs affecting exports to the U.S., though strong earnings growth expectations offer some support for equities.
Despite relatively low valuations compared to other markets, UK equities are suggested for an Underweight position due to global downturn risks not aligning with base forecasts favoring defensive sectors.
Europe contends with additional pressures under Trump's presidency amidst already challenging conditions; thus, maintaining a modest Underweight stance is recommended despite current market valuations reflecting these difficulties.
Asia Pacific's outlook hinges on China's stimulus efforts and Japan's structural reforms counteracting trade tensions introduced by Trump’s tariffs. Cautious optimism prevails for Chinese equities given manageable headwinds and potential upside gains in Japanese markets driven by inflation targets and governance reforms.
For further insights into these perspectives alongside commodity and currency forecasts, consult the complete Global Insight 2025 Outlook report or individual articles provided by RBC Wealth Management.