- According to Capital Economics, stock prices will rise towards the end of next year.
- The ongoing stock bubble is nowhere near the levels seen in 1929 or 2000, suggesting further upside is to come.
- Meanwhile, the Fed may cut interest rates more than investors expected, the company said in a recent note.
Capital Economics says the S&P 500 will continue to soar through at least 2026 as stock prices continue to rise and the Federal Reserve is set to cut interest rates more than expected.
Economists at the research firm predict the S&P 500 index will rise to 6,500 by the end of 2025, implying a 26% rise from current levels.
This is in direct contrast to what more bearish commentators are saying, with some market experts warning of an impending stock correction as the S&P 500 reflects other historical bubbles.
However, Capital Economics said stocks appear less overvalued than in past periods. Shiller’s S&P 500 excess CAPE yield, which measures the valuation of stocks relative to bonds, remains below the levels seen in 1929 or the dot-com bubble, suggesting stocks could rise “significantly.” It shows.
“We expect ‘risk’ assets, particularly stocks, to continue to outperform ‘safe’ assets in the coming years as the bubble continues to expand in the stock market,” the economists said in a note Thursday.
Meanwhile, the Fed is expected to cut rates soon, and the rate cuts are likely to be much wider than the market expects, the company said. The Fed will announce its first rate cut in June, and the company estimates it could ultimately cut rates by 200 basis points by mid-2025, above what the market is already pricing in.
“There is a risk of holding out until July as the economy remains strong. That said, we still expect more rate cuts than investors,” the economists added.
Markets have been waiting for a rate cut for more than a year, as lower interest rates could ease financial conditions and lead to an increase in risky assets such as stocks. Fed officials expect a rate cut of 75 basis points in 2024. Meanwhile, investors are pricing in a 65% chance of the first rate cut by June, according to the CME FedWatch tool.
