Wharton emeritus professor and WisdomTree senior economist Jeremy Siegel sees upward momentum for markets going into next year, adding that the Federal Reserve is on track for a soft landing with four more rate hikes likely in the next six meetings.
The benchmark S&P 500 index has surged more than 23% this year to new all time highs, boosted by the Federal Reserve’s aggressive rate cut in September. In the last two years, the index has almost doubled thanks to resilient economic data and surging corporate earnings.
“These past two years, stock market returns have been way above average: The danger here is that people think that this is the new normal,” Siegel said in an interview at the eighth annual Forbes/SHOOK Top Advisor Summit at the Encore At Wynn hotel in Las Vegas on Wednesday. “I do not see any slowdown on the horizon… The momentum is definitely there for markets to carry on into next year.” He sees the benchmark index posting a more normalized gain of 7.5% to 8%—with 2% inflation—in 2025.
“On September 12, the Fed gave the go ahead that they would act aggressively if they saw any weakness in the economy, which sharply lowered the chances of a recession,” he said. The famed economist called for another 100 basis points of rate cuts by June of 2025. “Unless things skid, we won’t see more than 25 basis points at a time,” he predicted, with the caveat that a weak labor market might cause the central bank to move more aggressively.
Siegel taught macroeconomics classes at Wharton for decades and wrote a best selling book in 1994 called Stocks for the Long Run. He agreed with the notion that the Dow Jones Industrial Average could hit 36,000 (in 1994 the Dow was less than 4,000). This week in front of a room full of top advisors, Siegel pointed out that money supply has once again been growing at a normal rate in recent months, and while not exactly a trend, it is certainly a promising sign for the economy as it means people are continuing to take out loans. “We are on track for a soft landing—the knowledge that Powell will act more aggressively if he sees weakness in the economy is a positive.”
Despite the Fed’s monetary easing cycle in the short term, Siegel predicted that long term rates won’t go down. By the middle of 2025, he believes the Fed funds rate will hit 3.5% and the 10-year bond will go to 4.5%.
His advice? Stay invested in equities. “Stocks are regal assets,” Siegel said. “They are the perfect inflation hedge.” While he thinks there is a bifurcated market and that the S&P 500 as a whole looks expensive, Siegel also pointed out that outside of the mega cap tech names, valuations are much more reasonable. The Mag 7 stocks all have to reach high bars, he added: “The story and spending has to continue, not to mention they need to monetize AI.” As far as global equities, Siegel noted that many major indexes outside of the United States offer far more appealing price to earnings ratios. “International is a value shop,” he said.
Siegel also cautioned investors about private market investments eventually turning into a bubble. “Private equity and private credit are talked about like these unfound asset classes that are undervalued, but if there is a recession, we will see a wave of defaults.”
While he remains cautiously optimistic, Siegel is by no means under any illusion that the party can go on forever. “There will be a bear market at some point—there always has been through history,” he said. “Has it ever been right to sell in a recession or bear market? Never.”