We approached 2025 with a great deal of trepidation: elevated equity valuations, elevated inflation, rising unemployment, impending tariffs, war, etc. It left me feeling bearish, but with a significant caveat. We posted The Year Ahead: 2025 on Jan 13, with the S&P 500 closing at 5836 and offered the following forecast:
I’m looking for December CPI due out this Wednesday to top 3% and to go even higher for January (due out Feb 12.) Depending on how inflationary Trump’s tariff and deportation announcements are next week, we could easily see the 10Y reach 4.83-5.0% – testing the Nov 2023 highs.
…the Jan 2022 highs of 4818 were never backtested. This price level would cross the yellow channel .236 line in April 2025 or the yellow channel bottom in Feb 2026.
Taking all the above into account, I have a bearish bias going into 2025, even though Trump’s (and Musk’s) laser focus on positive stock performance renders any bearish forecast suspect. If I’m wrong, then we can expect a number of factors to come into play such as a weaker dollar, lower oil/gas prices and, of course, much lower values for VIX.
If I’m right, however, the following downside targets should be recognized.
4818-4883 (-21%)
4518 (-25.9%)
5459 (-10.5%)
5329 (-12.6%)
I want to be clear, however, that any drop below 5459 (-10.5%) would likely be met with an enormous effort to prop up stocks. It’s also safe to say that the bulls will definitely defend the SMA200 – currently at 5578.
A few days later, CPI reached 2.9% [it would reach 3.0% the following month] and the 10-year reached 4.81%. It was a 5-alarm fire for Trump, who had returned to power on the promise that he’d “end inflation on Day One” and the implicit promise that equity prices would rise.
Oil, which had spiked by over 20% in the previous 30 days, was the first fire to be targeted. Trump’s first state visit was to Saudi Arabia, resulting in a spectacular 32% crash in oil prices over the next three months. It must have rankled the oil company CEOs who had pledged $1 billion to aid Trump’s election.
It might have actually crushed inflation had it not been for Trump’s ill-advised rollout of widespread, inflationary tariffs on Apr 2.
As we expected, the rise in inflation in January and February had led to a fear of stagflation, which resulted in the market stalling and ultimately topping out on Feb 19 at 6147. The tariff announcement gave SPX a push. It tumbled to our 5459 target on Apr 3, our 5359 target on Apr 4, and our 4818-4883 target on Apr 7. At the eventual bottom at 4835 – 18 points from our backtest target – it had fallen by 21.3%.
The afore-mentioned crash in oil prices began in earnest at this time, sinking 24% in a single week. It temporarily brought CPI down into the 2.3-2.7% range, though it was back above 3.0% by September. Stronger measures were needed, and they provided the boost the market needed to rebound.
Rebounds are always the tougher aspect of our forecasts. It didn’t help that there was substantial divergence among the major indices.
SPX came up just shy of a full backtest, while COMP overshot its backtest target. But, as in 2016, it was the DJIA that mattered the most – crashing 13.6% in a single week to nail the January 2022 highs. Two sessions later, it rallied 8.3% in a single day when Trump announced a pause in the tariffs he had just unleashed on the global economy – the equivalent of an arsonist sprinkling a little water on the fire he started.
The rebound eventually took hold two weeks later when SPX backtested the falling channel it had broken out of. The fundamental picture was muddled at best because the tariff picture was muddled. As we wrote in our Apr 29 Big Picture post:
,,,this Big Picture forecast comes with a massive caveat: they are absolutely subject to the continuation of Trump’s tariffs. If he backpedals, reverses, or changes the terms enough, the risk is to the upside – at least short term. If he sticks to his guns, the risk is very much to the downside – at least until the markets force him to blink again.
It didn’t help that the data coming out of the federal government was becoming increasingly suspect. Almost all of the inspectors general had already been fired (right after the 2024 election.) The BLS commissioner was fired after a disappointing jobs report (which didn’t support Trump’s rosy narrative.) And Fed chair Jay Powell was under attack for not being dovish enough.
The FOMC was justifiably concerned about the inflationary effects of Trump’s tariffs, but also about a worsening employment situation which raised the specter of stagflation.
Trump found himself in a catch-22: admit to worsening employment and the need for a rate cut or insist that the economy was doing great (and, was therefore in no need of a rate cut.) In the end, the solution was vintage Trump: secure a sharp drop in oil/gas prices from his Middle East pals to bring down inflation and interest rates, keeping up the pressure on the FOMC, and “fine-tuning” the tariffs when markets needed a boost.
Since CPI is a year-over-year measure, inflation only needed to be held steady for few months. It was the opposite of what happened to gas prices in 2021, when the huge year-over-year price change from the COVID lows of 1.88 to 5.06…
…saw CPI race from 1.7% in Feb 2021 to 9.1% in Jun 2022. It was worsened significantly by Russia’s invasion of Ukraine in Feb 2022.
Prices are still 11% higher than they were in 2018. But, the YoY change in gas prices has been negative every month since Feb 2025 – offsetting the inflationary changes in many other components of CPI such as food away from home (+3.7%), fuel oil (+11.3%), natural gas (+9.1%), electricity (+6.9%), and used cars (+3.6%),
The result is that CPI has appeared to be under control, mitigating the impact of tariffs which would otherwise support a stagflationary outlook. The lows that we called in May [see: CPI Lower Than Expected] didn’t hold, but were low enough to get stocks up over the resistance we had identified.
The biggest contributor to lower inflation remains oil and gas, which registered double digit declines. Unfortunately, the 12% YoY decline in retail gas prices has likely bottomed out unless CL and RB continue to fall. At current prices, the YoY delta will be back to flat – removing a key source of falling inflation rates.
As we discussed in our Jun 20 Big Picture post, the runup in oil/gas prices had likely run its course. On Jun 23, with CL at a high of 78.40 and RBOB at 2.40, we hazarded a forecast:
A spike in oil prices makes Fed rate cuts extremely unlikely. At some point, it even argues for a rate hike. Therefore, I assume that oil prices are due for a retreat – unless, of course, things spiral further out of control in the Middle East.
Remember, the last time oil prices reversed back below the triangle top they fell about 25%. (from January to April.) CPI fell commensurately, from 3.00% in January to 2.35% in April. There is nothing so appealing to Trump as a huge drop in inflation that would force the Fed’s hand in cutting rates.
WTi had fallen to 56 and RB to 1.74 by the middle of October, enabling CPI to remain below 3.0%. CL had no trouble reaching our 57 target and came within 2% of our 53.87 target.
RB slightly overshot our 1.75 target.
Currency pairs were a mixed bag in 2025 – at least as they related to equity prices. The yen carry trade was relatively reliable, with a strong positive correlation between yen weakness and equity strength. But, the range was relatively small as the value of the USD was pummeled by the disintegration with formerly cooperative trading partners and, of course, by the volatile inflation and tariff picture.
Don’t look now, but DXY has almost fallen to our 98.976 target from last year. The culprits are numerous, led by the euro and yen which are both soaring relative to the greenback. The EURUSD has broken out and has nearly reached our 1.15 target.
These moves represent a very serious development for US markets, as the targets were initially established as part of a worst case scenario in 2024 and are exacerbated by a breakout in the 10Y yield.
The breakout in the 10Y is contrary to (temporarily) tame inflation and, as we have discussed, is consistent with a rejection of the USD and of Treasuries at a time when they would normally be buoyed by a flight to safety.
The correlation between DXY and SPX was all over the map, so it was easier to forecast the moves in currencies than it was to forecast the impact on equities.
The volatility in interest rates, both in the US and in the eurozone, made forecasts all the more difficult.
In the end, euro strength and USD weakness were aided by rising interest rates in the eurozone – due largely to the reduction in US military support for Europe and NATO pursuant to Trump’s America First posture.
As for US interest rates, the initial Apr 2025 plunge in the 10Y which was driven by the tariffs and trade wars (and, later, remedied by the sharp drop in oil/gas prices) saw the 2s10s break out. Had the 2s10s not reversed by early May, the equity downturn would surely have been much worse.
As detailed above, drops in oil/gas prices were plentiful and convenient, enabling occasional flattening on an as-needed basis.
We’ll dig into most of these developments in greater depth in our next post – a look ahead at 2026, due out in the next week or so.
In the meantime, stay frosty. More geopolitical and economic uncertainty is on the way.
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