Janice R. Andrews
According to a recent Capital Economics analysis, economists are bullish about the S&P 500’s ongoing surge and predict a significant 26% increase by the end of 2025, with growth expected to continue until at least 2026. This optimistic picture is supported by predictions that the Federal Reserve will decrease interest rates more aggressively than the markets now believe.
The research firm’s prediction deviates significantly from the cautions of more pessimistic analysts who have been forecasting an impending correction similar to previous market bubbles. According to Capital Economics, even with the remarkable rise in stock prices, current valuation measures do not reflect the extremes seen in the infamous 1929 and dot-com bubbles.
Capital Economics reports that there is still substantial space for market growth based on the Shiller’s S&P 500 Excess CAPE yield, which compares stock values to bond rates. This measure suggests that there may be further upside because the market is still far below the levels seen during previous bubbles.
In a recent analysis, Capital Economics experts stated, “We expect ‘risky’ assets, especially equities, to continue to outperform’safe’ ones over the next couple of years, as a bubble continues to inflate in the stock market.”
In this hopeful scenario, the role of the Federal Reserve is paramount. According to Capital Economics, the Fed will start a rate-cutting cycle that is more aggressive than what the markets are presently pricing in. According to the research group, the Fed may lower interest rates for the first time as early as June and lower them by 200 basis points by the middle of 2025.
“The economy is still strong, so it’s possible that the Fed may postpone raising interest rates until July. However, in contrast to market expectations, we are projecting a more significant sequence of rate reduction,” analysts said.
For more than a year, the market has been anticipating rate reductions due to the conviction that reduced interest rates will improve financial circumstances and support riskier assets such as stocks. Rate cuts of 75 basis points are anticipated by Federal Reserve policymakers for 2024. On the other hand, the CME FedWatch tool shows that investors are presently pricing in a 65% chance of a rate decrease by June.
The positive view from Capital Economics highlights the increasing belief in the stock market’s durability and the possibility of long-term growth fueled by accommodating monetary policy. The research firm’s study indicates that the S&P 500 might have a strong upward trajectory over the upcoming years, setting investors up for continuous gains far beyond 2026, even if market conditions are still vulnerable to change.
