As per a report released by BCA Research, there are considerable risks looming over the U.S. stock market in the initial half of 2025. The investment analytics firm forecasts a potential decline of more than 20% in equities at some point next year, which could occur even in the absence of a recession. Doug Peta, the chief investment strategist for the U.S. at BCA, highlights multiple factors that may trigger a downturn in the market.
The momentum in consumer spending is diminishing as the surge of post-pandemic “revenge spending” begins to wane. Retail giants including Home Depot, Lowe’s, Walmart, and Target have noted indications of reduced consumer spending and an increase in discount-seeking behavior. Additionally, the labor market is exhibiting subtle signs of softness.
Insights from the Job Openings and Labor Turnover Survey (JOLTS) indicate a decline in hiring rates, with critical metrics such as quitting and hiring figures touching four-year lows. According to BCA strategists, some employers might be using return-to-office policies as a means to reduce their workforce without offering severance packages.
Heightened concerns for the U.S. stock market
Valuations also raise alarms. The S&P 500 is currently trading at close to 23 times its projected earnings, significantly above the usual historical average, by almost two standard deviations. Furthermore, corporate bond spreads remain tight, with both investment-grade and high-yield spreads hovering near historical lows.
“While we consider a recession in 2025 to be more probable, risk assets might perform poorly even if a recession does not materialize, and the existing prices do not bode well for future returns,” the report articulates. BCA advises adopting a defensive strategy, suggesting that investors should consider underweighting equities. While the firm recognizes the chance of a short-term rally that could last until year-end and into January, they predict the onset of an equity bear market during the first half of 2025.
“We are keen to reduce the underweight position soon after we reach the threshold of a 20% bear market, and we will likely aim to overweight equities when they decline by around -30% to -35%,” BCA strategists observe. The report insinuates that investors may not be fully aware of the risks as they approach 2025, describing existing market sentiment as “overly complacent.” Although financial markets currently imply a minimal recession risk, BCA cautions that such overconfidence could lead to some considerable disappointments. “Historical data does not favor the bulls from both a macroeconomic and market valuation standpoint,” the report concludes, highlighting the precarious nature of equity markets in today’s atmosphere.
