Stocks could be in store for another banner year in 2025, according to Deutsche Bank. “As we look forward to 2025, we shouldn’t let a pessimism bias overtake us,” London-based strategist Henry Allen wrote on Monday. “Of course, random and unexpected shocks are likely to hit at several points. But the current market backdrop is an incredibly favourable one, meaning that 2025 is capable of being another strong year.” Factors that could contribute to another record run for equities include the lack of a looming economic downturn, a favorable soft landing environment when the Federal Reserve is cutting rates and further potential upside for risk assets if inflation begins surprising to the downside. Allen’s outlook comes in the wake of the S & P 500 scoring its second-consecutive annual gain of more than 20% in 2024. Wall Street has largely priced in “many of the most obvious risks” of what could go wrong for stocks in the future, Allen noted. Investors have already included the risk of President-elect Donald Trump’s proposed plans for broad tariffs on imports , and the expectation for inflation to continue to run above the Federal Reserve’s 2% target. All that leaves Wall Street with a good sense of visibility entering 2025, Allen said. The strategist downplayed the stock market’s lofty price-to-earnings multiples, and the resemblance to the dot com boom of the late 1990s. Unlike the top of that first internet market in 2000, which coincided with an economic slowdown, signs of a recession and then a downturn, macroeconomic conditions today remain on stable footing, according to Allen. By contrast, today’s recession signals have abated, Allen said, citing the the fact that the spread between the 2- and 10-year Treasury note yield is no longer inverted (which happens when short term yields are higher than long-term yieldss), while the so-called Sahm Rule is also pointing away from a recession after signaling the chance of one over the summer, when joblessness rose. “Collectively, the fact that multiple leading indicators are now pointing away from a recession again should add to confidence about the outlook,” Allen said. Further supporting Allen’s bullish outlook for stocks this year is the fact that the Federal Reserve has been cutting interest rates against the backdrop of a soft landing , not in response to a recession, with the latter historically resulting in poor stock performance. And given the lagging effects of monetary policy, the potentially positive effect on stocks of the latest easing has yet to be fully felt, Allen noted. Part of the reason stocks slowed their rapid ascent toward the end of 2024 was because the Fed took a more hawkish stance in response to still-persistent inflation, signaling fewer rate cuts in 2025 than previously expected. Allen says stocks would see another upside catalyst if inflation begins to dampen again, leading “to a fresh rally across bonds and equities.” Stocks rebounded on Monday , led by higher prices for chip stocks including Nvidia and Broadcom . Investors also drew optimism from a Washington Post report that said Trump is considering narrowing the scope of his proposed tariffs.
Reasons why Deutsche Bank thinks 2025 can be another great year for stocks