Our Opinion: 2025
Will the bull market continue?
A month hasn’t gone by this year without the experts forecasting disaster for markets. First, we heard that the bubble in the stock market following Donald Trump’s election was about to burst. US disillusionment with Ukraine and its withdrawal from the defence of Europe would lead to a Russian blitzkrieg on Europe. Then, tariffs were a catastrophe that would lead to at least a US, if not a global, recession.
Next, rising budget deficits in the US, UK, Europe and Japan would lead to a funding crisis and a crash in the bond market. With the launch of DeepSeek, Chinese technology was set to torpedo the ‘Magnificent Seven’ US stocks. Finally, Israel’s pre-emptive strike on Iran, followed by the US, would send energy prices sky-high, triggering inflation.
And yet the FTSE 100 index is up 6% in 2025, the S&P 500 3.8% and the MSCI AC World index 7.3%. Sterling’s 9% gain against the dollar has turned the sterling gains negative, but this is hardly Armageddon. Moreover, the US market is outperforming again.
Meanwhile, ten-year government bond yields have fallen to 4.5% in the UK and 4.3% in the US. Many of the dire forecasts for the US economy and markets are dictated by politics rather than analysis, and are based on a disdain for Trump.
JPMorgan and Goldman Sachs have reduced their assessment of the probability of a US recession from 60% to 40% and 45% to 30% respectively. A sharp cutback in government spending might still cause a recession, but, as Argentina has showed, this can be bullish for markets and the private sector. The US economy is probably slowing and the UK and much of Europe is in structural stagnation, but there is no need for investors to worry.
With Nvidia’s share price hitting all-time highs again and the recovery of the US market led by the Magnificent Seven, worries about Chinese technology are abating. Rumours are circulating that Chinese president Xi Jinping’s hold on power is diminishing and that he may be forced to step down. This would be very positive for US-China relations.
Conflict in the Middle East has severely reduced the power, threat and influence of Iran, potentially to the benefit of the whole Middle East. The prices of oil and gas have fallen back to levels seen before Israel started bombing targets in Iran, while the Strait of Hormuz remains unblocked. Russia’s much-predicted summer assault on Ukraine has failed to materialise and the threat to Europe of Russia is fading.
That undermines the risk of cost-push inflation and may explain why bond yields have faded despite large and growing fiscal deficits. These may still precipitate a fiscal crisis.
So why are most pundits so persistently gloomy? Part of the reason lies in the popularity of pessimism, Pessimists attract attention, optimists are ignored. Hedge funds, investment strategists and talking heads in general have a vested interest in making the world look a dangerous place to justify their standing. Investors like making money, but they hate losing money more than they like making it. Pandering to fear is better for business than pandering to greed.
But this has consequences. Research shows that only 20% of potential UK investors feel very confident about investing ,with the fear of losing money stopping 71% of them. Of course, short-term losses are endemic to investing; good investment decisions take time to be proved right. Interest rates of 4.25% in the UK and US may look tempting (and are higher than inflation, before income tax) but, long-term stock market returns have been 8% ahead of inflation over ten and 20 years and 9% ahead over 50.
The US stock market looks expensive on more than 20 times forward profits, but without a recession and a consequent fall in earnings, what will cause it to fall? Other markets and smaller companies are much cheaper, although not necessarily better value.
Of course, there are risks, but the real worries are what Donald Rumsfeld, the former US Secretary of Defence, called the “unknown unknowns: the things we don’t know we don’t know”. Everything else has been weighed by investors and is largely in the price.
13th July 2025
