The US stock market experienced a rather aggressive sell-off on Wednesday after the Federal Open Market Committee signalled less-than-expected rate cuts for 2025.
Still, market research and insights firm Yardeni Research says the worst is yet to come.
Experts at Yardeni Research warned clients of a steeper sell-off in January as investors opt to “take their substantial profits early next year rather than now to defer capital gains taxes” in their recent report.
The benchmark S&P 500 index is up close to 25% versus the start of this year at writing.
Initial days of Trump 2.0 to weigh on US stocks
Yardeni Research expects increased volatility once Donald Trump takes office in January.
That’s because the market will be hit with a “blizzard of executive orders, including a bunch imposing tariffs and authorizing deportation of illegal migrants” on day one of Trump 2.0.
Additionally, a potential dockworkers strike could weigh on US stocks as well next month.
“There could be a longshoreman’s strike in mid-January because they oppose automation at the ports. Trump publicly declared that he agrees with the dockworkers,” the firm added in its research note.
Versus its record high, the S&P 500 index is down 3.0% at writing.
S&P 500 may be headed for a 10% pullback
Yardeni Research is particularly concerned that a protectionist trade policy under the new government could increase production costs, potentially leading to a resurgence in consumer prices.
Put together, these risks could result in a 10% pullback in US stocks, the firm warned.
It, however, remains bullish for 2025 as a whole.
Yardeni Research expects the S&P 500 to hit 7,000 by the end of next year that translates to about an 18% upside from current levels.
“We would view that as a buying opportunity rather than as a reason to panic out of the market since we don’t expect a recession or a bear market,” said Yardeni Research experts.
Catalysts that could drive S&P 500 up in 2025?
The US Federal Reserve now anticipates cutting rates only two times in 2025 – down significantly from four it signalled previously.
Still, Yardeni Research is not the only firm that continues to see a roaring bull market in the coming year.
Deutsche Bank analysts led by Binky Chadha also expect the benchmark index to hit 7,000 next year.
Chadha forecasts a potential increase in mergers and acquisitions to help unlock further upside in US stocks.
He also expects higher capital expenditures from companies other than big tech to serve as a tailwind next year.
Finally, the investment firm anticipates economic recovery overseas to reflect in the S&P 500 index as well in 2025.
Both Yardeni Research and Deutsche Bank have the highest year-end targets on the benchmark index for next year at writing.
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