• Forecasts for 2025 are overly optimistic, assuming high P/E ratios and 6% earnings growth, ignoring potential risks and threats.
• A return to historical P/E averages could result in a 45% market loss, highlighting the bubble's fragility.
• Baby boomers face unique risks; their 60/40 stock/bond mix is too risky, and they should consider inflation hedges like gold and TIPS.
• Younger investors may recover from market downturns, but baby boomers must protect their savings to avoid severe financial hardship.

It’s that time of year again when pundits are forecasting next year’s stock market performance. I believe investors are being Gaslighted more than usual this year because the basic underlying assumptions are optimistic and unlikely. There are  two basic assumptions being made in most forecasts:

1. Current Price/Earnings ratios will remain at their lofty levels in 2025
2. Earnings will grow by 6% or more

Sample Forecasts

The following table summarizes typical return forecasts for 2025.

The average forecast for this sample is an 8.2% return, which is low by historical standards since the US stock market has returned 10% per year over the past 99 years. Most importantly, the narratives that accompany these forecasts are optimistic in seeing only the positives, typically the emergence of artificial intelligence (AI) – so “it’s different this time”. Note that there is not a single forecast of a loss in 2025.

There is little or no mention of the threats we face, as discussed below; hence my Gaslighting assertion. Wall Street needs investors to stay invested.

The Arithmetic of Return Forecasting

As shown in the following table, forecasters need to make assumptions about three outcomes in the future: dividends, earnings and end-of-year Price/Earnings ratio. The green highlighted section of the table locates current forecasts of an 8% return in 2025   that are consistent with the assumptions that P/Es remain near 30 and earnings grow by 6% or more.

The table also shows a 45% loss if P/Es return to their historic average of 15. In other words, it’s what could happen if the current bubble bursts. But a pandemic didn’t burst the bubble, so what could? There are reasons the bubble exists, and dangers that could spoil the fun.

Bursting Bubbles

When COVID-19 was recognized as a pandemic in February 2020, the stock market plummeted 35%. Many said COVID was the match that lit the overvalued tinder, but the flame was extinguished quickly, and the bubble inflated more even though the economy suffered. The stock market disconnected from the economy, but this is probably temporary. COVID is only one of many threats to the economy and stock market.

We’ve warned of 22 threats summarized in the following:

No one knows how or when these threats will explode, but it’s unlikely that none will occur in this critical decade for baby boomers, as discussed in the next section.

The Baby Boomer Conundrum

There has never before been 78 million Americans worth $50 trillion all simultaneously in the Risk Zone spanning the ten tears before and after retirement during which lifestyles could be devastated by investment losses. At this stage in their lives, the number one investment objective of baby boomers should be to protect their lifetime savings, but the average boomer is invested 60/40 stocks/bonds, which is too risky; it’s a mix that lost more than 35% in 2008. In other words, baby boomers are on the wrong course, so advice to stay the course is plain wrong.

The conundrum in moving to safety is two-fold: safe assets pay no interest, and even worse, current money printing could radically reduce the purchasing power of money by bringing serious inflation. Consequently, baby boomers should consider protecting themselves with the following inflation hedges:

• Precious metals, especially gold
• Other currencies, especially cryptocurrencies
• Treasury Inflation-Protected Securities: TIPS
• Commodities
• Certain real estate, like farmland   

Staying the course could work out for younger investors with long time horizons because recoveries are likely, but some recoveries, like the Great Depression, take a decade to materialize.

Conclusion

Most stock market forecasters choose to ignore the threats that are facing the US economy and stock market, but investors should not allow themselves to be gaslighted. Younger investors will probably come through the next crash unscathed, but baby boomers cannot be that cavalier because they could find themselves “living under the bridge eating cat food.”

More By This Author:

Santa’s Gift to the Stock Market
Framework for Forecasting Next Year’s Stock Market Return
The Federal Reserve Has Engineered a Recess of its Asset Hemorrhaging