Interest rate cuts could further boost prices

The US Federal Reserve could cut interest rates further in 2025. That could send stock market investors into a frenzy. There are some companies where you should be particularly careful.

The Christmas surprise in the USA in 2024 happened on the Wednesday before Christmas. Speculative investors and investors had prepared themselves for the fact that the US Federal Reserve would not disrupt the pre-Christmas mood. But then, in his speech from inflation to the interest rate break, central bank chief Jerome Powell tackled every topic that was causing unrest among stock market investors.

The shock could then be seen on the fear barometer VIX (short for Volatility Index). It reflects expectations for fluctuations in the US stock market. Within two hours it shot up 74 percent. To put this into perspective: The last time such a larger percentage increase happened was in 2020 in the wake of the corona pandemic. And that might not be enough.

“The Wednesday before Christmas could be a re-submission for investors in 2025,” says Franz-Georg Wenner from the IndexRadar stock market newsletter. Because, says Vanyo Walter from the broker RoboMarkets: “The financial markets depend on money from the central bank and rising interest rates are not welcome.” Rising interest rates mean ten-year US government bonds, which currently yield well over four percent.

The experts at the asset manager Pimco noted that Federal Reserve Chairman Powell justified his stance “with recent stagnating progress in combating inflation as well as the uncertainty surrounding the expected fiscal and trade policy of the incoming US government.” This is indeed a very important point for 2025.

The mood in the USA is certainly good economically and cannot be compared with the depression in Germany. But the USA is also expensive, and not just in terms of the prices for everyday life. Given the high valuations of US stocks and the bets that interest rates will continue to fall, some have said that US stocks, like Bitcoin, were “on drugs” – in the rush of cheaper money again.

“The price-to-book value ratio for the S&P 500 is now required to be 5.3. This means that the US leading index is gradually approaching its high of 5.5, which was reached at the zenith of the technology bubble in spring 2000,” says RoboMarkets expert Walter. The equally popular price-earnings ratio based on profit estimates for the next twelve months is around 22.3, well above the ten-year average of 18. But average values ​​usually only show half the story.

The valuation multiple of the “Magnificent 7” – the seven most expensive tech companies – in the S&P500 has risen to around 34 and is also distorting the index average upwards due to the high weighting. Without the tech giants, the P/E ratio would be only slightly higher at just under 20.

This could still be justified with profit growth for the S&P 500 companies of around ten percent for 2024 and an expected 15 percent for 2025. The bet is that in addition to the convincing profit growth and the high return on equity, extensive share buyback programs will also have an impact, as will the strong position of the S&P 500 companies US companies on future growth drivers such as AI and big data. Tax relief and deregulation by the future Trump administration should be the icing on the cake.

All of these positive arguments are well known. However, the valuations of the stock market are always in competition with bonds and under the assumption that the central bank is at least not restrictive. Before Christmas there was at least a small warning that you shouldn’t be too sure.