Economy

NEW YORK (Reuters) -Investors are expecting more gains for the U.S. stock market in 2025 after two straight standout years, fueled by a solid economy supporting corporate profits, moderating interest rates and pro-growth policies from incoming President Donald Trump.The benchmark S&P 500 was up 23.31% in 2024, even with a recent speed bump, marking its second-straight year of gains exceeding 20%, lifted by megacap tech stocks and excitement over the business potential of artificial intelligence.The index soared 53.19% over the last two years, the biggest two-year percentage jump since 1998. Investors are more confident about the economy than this time a year ago, with consumers and businesses having absorbed higher interest rates and the Federal Reserve now lowering them – albeit by not as much as hoped. Corporate profits are also expected to be strong, with S&P 500 earnings per share projected to rise 10.67% in 2025, according to LSEG.On the other side of the ledger, inflation remains stubborn, and Wall Street is wary of a rebound that could lead the Fed to change course on its easing cycle. Indeed, stocks pulled back sharply earlier in December after the central bank projected fewer rate cuts next year as it braced for firmer inflation.Such prospects could become more likely if Trump implements tariffs on U.S. imports that lead to higher consumer prices. Stock valuations, meanwhile, are around their steepest levels in more than three years, leaving greater potential for turbulence.”We’ve been on quite the tear coming off the lows back at the end of 2022. It’s been pretty eye-watering,” said Garrett Melson, portfolio strategist at Natixis Investment Managers. “Animal spirits … are certainly running pretty wild right now, but you might need to temper that a little bit as you start to move through the year,” said Melson, who thinks the stock market could still produce solid gains of around 10% in 2025 if not the returns of the prior two years.Wall Street firms are mostly projecting gains for the market next year, with S&P 500 year-end targets ranging from 6,000 to 7,000 points. The index ended 2024 at 5,881 on Tuesday.Optimistic investors can point to a bull market that is neither old nor over-extended by historic measures.The current bull market for the S&P 500 that began in October 2022 is less than half as long as the average length of the 10 prior ones, according to Keith Lerner, co-chief investment officer at Truist Advisory Services. The S&P 500’s roughly 64% gain during this latest run trails the 108% median gain and 184% average rise of the prior bull markets, according to Lerner.”If you zoom out a little bit, yes, we have a lot of gains, but if you look at a typical bull market, it suggests that we still have further gains to go,” Lerner said.Other historic signs also bode well. The S&P 500 has gained an average of 12.3% following the eight instances of back-to-back 20% annual gains since 1950, according to Ryan Detrick, chief market strategist at Carson Group, compared to a 9.3% overall average increase over that time. The index increased six of the eight times. ECONOMY WEATHERING RATES Bolstering the upbeat sentiment is the prevailing sense on Wall Street that the economy has weathered the rate hikes the Fed implemented starting in 2022 to quell inflation.A Natixis Investment Managers survey conducted in recent weeks found 73% of institutional investors said the U.S. will avoid a recession in 2025. That is a sharp turnaround from a year ago, when 62% projected such a downturn in the coming year. Citigroup (NYSE:C)’s economic surprise index, which measures how economic data performs versus expectations, has been solidly positive for the past two months, another rosy sign for investors.Adding to expectations of a solid economy, Trump is expected to pursue an agenda that includes tax cuts and deregulation that supports growth.”We’re leaving 2024 on pretty good footing, and we think there is some re-acceleration in 2025,” said Sameer Samana, senior global market strategist at Wells Fargo (NYSE:WFC) Investment Institute. “Markets tend to front-run the economy, so they will position for that economic re-acceleration sooner rather than later.”However, stocks are also leaving 2024 at elevated valuations: the S&P 500 was trading at 24.82 times expected earnings over the next 12 months, according to LSEG. That is well above its long-term average of 15.8, and not far from the 22.6 level it reached earlier this month, its highest since early 2021. Investors maintain that valuations can stay high for long periods and do not necessarily indicate imminent declines. But future gains may rest more on earnings growth, while higher valuations could make stocks more easily rattled by any disappointments.Risks include policy uncertainty such as Trump’s expected push to raise tariffs on imports from China and other trading partners, which analysts estimate could hurt corporate profits. Higher tariffs could also increase inflation, which is another worry for investors. The pace of inflation has fallen dramatically since hitting 40-year highs in 2022, but remains above the Fed’s 2% target. The latest reading of the consumer price index found a 2.7% annual inflation rate.”How low we can get rates is really going to be dependent on how low we can get inflation,” said Michael Reynolds, vice president of investment strategy at Glenmede. “If we see inflation settling out to the 3-ish percent range, we think the Fed’s not going to be as aggressive next year.”Glenmede is recommending investors take a neutral posture on overall portfolio risk, including for equities. “Investors should be what I would call cautiously optimistic,” Reynolds said. “We … have an economy that’s showing signs of late-stage expansion alongside valuations that are pretty rich.” More

JERUSALEM (Reuters) – Israeli Prime Minister Benjamin Netanyahu got up from his hospital bed to call on unruly coalition partners to fall in line and back his government’s 2025 budget after hardline rebels threatened to pull support for the bill. Netanyahu, recovering from prostate surgery, came to the Knesset against the recommendation of his doctors to ensure the passing of legislation aimed at increasing state revenues after the far-right public security minister Itamar Ben Gvir and ultra-Orthodox parties said they might vote against the law or abstain. The bill, a wartime austerity package of tax hikes and spending cuts, passed narrowly but the opposition was another sign of ever-widening cracks in Netanyahu’s coalition, the furthest right in Israel’s history.In an initial vote earlier this month, Israeli lawmakers narrowly approved the budget bill despite a rebellion by coalition partners demanding he fire Israel’s attorney general.”I expect all the members of the coalition, including Minister Ben-Gvir, to stop rattling the coalition and endangering the existence of a right-wing government,” Netanyahu said on Tuesday.Ben Gvir has demanded more funding for the Israeli police which his office oversees, and ultra-Orthodox parties have expressed opposition to legislation that would force some members of its communities to enlist in the military. The budget next goes to the Knesset finance and other committees, where it could face changes. It is not expected to be fully approved until at least January. Failure to approve the budget by March 31 would trigger new elections.Netanyahu in September sought to bolster his coalition, which had a 64-56 edge in the Knesset, by bringing in opposition lawmaker Gideon Saar and his four seats in the New Hope (OTC:NHPEF) party, enabling him to be less reliant on other members of his ruling coalition. Saar last month was named foreign minister.Israel’s economy has taken a hit since the Oct. 7, 2023, attack by Palestinian Hamas militants and the ensuing war in Gaza and on other fronts.There has been zero growth but supply issues have pushed up inflation, and the cost of living for Israelis has soared.($1 = 3.6402 shekels) More

Despite being at war with Russia, Ukraine still transited Russian gas to Europe through pipes on its territory under the terms of a deal signed in December 2019.    Ukraine has repeatedly said it will not sign a new deal to replace the one expiring on Dec. 31 due to Russia’s full-scale invasion of its territory, now approaching its third year.    2025 could prove to be the first year since the collapse of the Soviet Union in 1991 when no gas will be transported through Ukraine to Europe.    Russia used to supply a little under half of the European Union’s gas before the 2022 war. But Europe has turned away from Russian gas while as yet unexplained attacks on the Nord Stream pipeline have reduced Russian supplies.     Russia supplied a total of around 63.8 billion cubic meters (bcm) of gas to Europe by various routes in 2022, according to Gazprom data and Reuters calculations. That volume decreased by 55.6% to 28.3 bcm last year. In 2024 transit could total less than 14 bcm of gas.    At their peak in 2018-2019, annual flows to the European region reached between 175 bcm and 180 bcm.     In pre-war years Ukraine received several billion dollars a year from transit, but in 2024 the payments could  drop to about $800 million due to a significant reduction in pumping volumes.      The Soviet-era Urengoy-Pomary-Uzhgorod pipeline brings gas from western Siberia via Sudzha in Russia’s Kursk region. It then flows through Ukraine in the direction of Slovakia.     In Slovakia, the gas pipeline is divided, with one of the branches going to the Czech Republic and the other to Austria. The main buyers of gas are Hungary, Slovakia and Austria. More

Wang Xiaohong, who is also the director of the national narcotics control committee, called for “eradicating the soil that breeds and spreads the drug problem” in a meeting, according to Xinhua.The United States has been pressuring China to help reduce U.S. fentanyl deaths. China says it has some of the strictest drug laws in the world, and that the U.S. needs to curb narcotics demand at home. More

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This article is an on-site version of our Chris Giles on Central Banks newsletter. Premium subscribers can sign up here to get the newsletter delivered every Tuesday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersA couple of months ago, it appeared as if 2025 might be the most remarkable year for international macroeconomics in many decades. Many economies were heading into what looked like a steady state. Inflation in leading economies was heading sustainably back towards central banks’ targets, labour markets were pretty much at full employment and interest rates were finding a neutral level, where they neither sought to restrain economic activity nor boost it. The growth outlook was close to trend. The future looked set to be one where observers could make a plausible case that leading economies were in what economists call “equilibrium”, or a “steady state” or what Keynes dismissively termed “the long run”. With Japan having had stimulative monetary policy since the early 1990s, this was rare indeed. Let’s be clear, a steady state or long-run equilibrium is far from a nirvana. Countries can be rich or poor and trend growth rates can be extremely weak. They can also be dissatisfied with the situation. But the significance is that it would not be clear what would happen next either to interest rates or activity because there would not be a significant imbalance to correct. That was then, however. Now that we are ending 2024, Keynes has had the last laugh and, just as in his original meaning for the phrase “in the long run we are all dead”, 2025 no longer looks like it will be the steady state it promised. Instead, central banks are ending this year in a state of some anxiety. Happy New Year!The Federal Reserve is worried about Trump and inflationIn what was a far from convincing performance, Fed chair Jay Powell laid bare his anxieties in the press conference after the US central bank’s latest meeting earlier this month. “Once again we’ve had a year-end projection for inflation and it’s kind of fallen apart,” he said, explaining the Fed’s new view that there were likely to be fewer rate cuts in 2025 than it previously expected and more inflationary pressure. Powell was clear that the Fed was closer to neutral interest rates with the cost of borrowing at 4.25 to 4.5 per cent. But that was not job done, he added. “We believe policy is still meaningfully restrictive.” Some members of the Federal Open Market Committee also included likely policies from the incoming Donald Trump administration in their economic projections, also raising interest rates and inflation from the previous forecasts in September. And, as for the long run, the FOMC is now far from certain about the meaning of “meaningfully restrictive”. As the chart below shows, the vast majority of the committee now thinks the long-run neutral interest rate has risen although members are much less certain what that rate is. Some content could not load. Check your internet connection or browser settings.The European Central Bank is worried about a slowdownThe European Central Bank was on a glide path towards neutral interest rates in the autumn. But winter has brought the additional chill of an economic slowdown that might require the ECB to stimulate the economy in 2025.Instead of maintaining a need for policy to remain “sufficiently restrictive” until inflation was beaten, ECB President Christine Lagarde explained that this language was removed because the central bank thinks the risk to inflation is now “two-sided”. Lagarde said the central bank saw a neutral rate somewhere between 1.75 and 2.5 per cent — only a touch below the current 3 per cent rate. So, rates are thought to be restrictive in Europe now, but 2025 might bring a need to drop them significantly. The Bank of England is worried about stagflationThe UK likes to pretend that its economy is different from continental Europe. In one respect it is. While the Eurozone has low growth and low inflation, there is a whiff of stagflation in Britain. Growth stalled in the three months to October, while underlying inflation has remained too high for comfort. Services inflation has been stuck at an annual rate of 5 per cent since September, with private sector regular pay growing at 5.4 per cent in the year to October. This data is likely to resolve in 2025 either in an inflationary or contractionary direction, but the current situation is deeply uncomfortable for the Bank of England, as was evident in the big splits on its Monetary Policy Committee at the December meeting. Some content could not load. Check your internet connection or browser settings.The Bank of Japan is worried about Trump and the yenHaving started a move into positive territory last spring and ended the zero interest rate environment that applied for almost all of this century, the Bank of Japan suddenly got cold feet about further normalisation. The economic numbers do not prevent further rises, but the central bank is caught between the contradictory concerns about imported inflation due to a weak yen, and fears of a Trump and tariff induced slowdown in 2025. The virtuous feedback between wages and prices the central bank hoped to see in 2025 is fading — although it is not out of sight yet. The People’s Bank of China is worried about becoming JapanIn December, the People’s Bank of China loosened its official monetary policy stance for the first time in 14 years to “moderately loose” from “prudent” in a sign that the Chinese authorities are increasingly worried about inflation that has hovered close to zero, lacklustre growth and barely any momentum in consumer activity. This is not a sign of confidence about growth and inflation in 2025 in the world’s largest economy. Falling Chinese bond market yields are an even better sign that investors believe the economy requires stimulus to maintain adequate growth rates. Some content could not load. Check your internet connection or browser settings.The Banco Central do Brasil is worried about repeating the pastSigns of stability are difficult to find in Brazil, with the currency hitting all-time lows in December, significant currency intervention by the BCB, and a rise in interest rates of one percentage point. Inflation is rising only modestly, but the Budget deficit is high and capital flight has been rampant. The economy will require financial stabilisation to restore confidence before any semblance of the “long run” can be found. This might prove tricky with President Luiz Inácio Lula da Silva saying earlier this month that “the only thing wrong in this country is the interest rate, which is above 12 per cent”. Some content could not load. Check your internet connection or browser settings.What I’ve been reading and watchingHelmut Schlesinger, the ultraorthodox Bundesbank president between 1991 and 1993, has diedIn an economy that has been far from stable in recent years, the Turkish central bank cut rates by 2.5 percentage points on December 26, citing a moderation in inflationary pressure. That brought the short-term rate down to a still hefty 47.5 per centJay Powell’s control over Fed monetary policy has been a series of flip-flops aggravating volatility around the world in 2024, according to Mohamed El-ErianRichard Barwell has a message for central bankers in 2025. Publish estimates of neutral rates, he demands. Barwell quite reasonably argues that these are important in internal assessments of monetary policy, so why do officials so often pretend otherwise?Recommended newsletters for you Free lunch — Your guide to the global economic policy debate. Sign up hereThe Lex Newsletter — Lex, our investment column, breaks down the week’s key themes, with analysis by award-winning writers. Sign up here More

The world’s second-largest economy has struggled to stage a robust revival this year as a prolonged property market downturn, mounting local government debt and subdued consumer confidence hampered growth.Exports, a key driver and a bright spot for the economy, could be threatened by potentially higher tariffs once President-elect Donald Trump returns to the White House later in January.In a televised speech, Xi said China had responded to the impacts of the changing environment at home and abroad and adopted a full range of policies to help it pursue high-quality development in the past year.Since late September, authorities unleashed a blitz of stimulus measures including broad rate cuts and looser rules around home buying to shore up the property market and domestic demand.”Current economic operation faces new challenges, including challenges of uncertainties in the external environment and pressure of transformation from old growth drivers to new ones,” Xi said. “But we can prevail with our hard work. As always, we grow in the wind and rain, and we get stronger through hard times,” he added. “We must be confident.”In another speech at a New Year event earlier on Tuesday, Xi said China’s GDP is expected to have grown by around 5% this year, suggesting the country is set to meet 2024’s official growth target.Earlier this month, top leaders pledged a shift to an “appropriately loose” monetary policy in 2025, which would mark the first such easing in 14 years. They also vowed to spur consumption and increase bond issuance to stimulate growth next year.Chinese authorities have agreed to issue a record 3 trillion yuan ($411 billion) worth of special treasury bonds in 2025, Reuters reported, citing sources.The country’s budget deficit is set to rise to 4% of GDP in 2025, sources said separately, while the government plans to maintain a growth target of around 5%.($1 = 7.2993 Chinese yuan renminbi) More

Prabowo said the decision should end speculation over which items and services would be affected by the VAT increase.The decision also reversed an announcement by finance ministry officials in December. Authorities at the time had said the VAT hike would apply across the board except for cooking oil sold under a government programme, sugar for industry and wheat flour, which would still be subject to an 11% VAT rate.”Today, the government has decided that the increase of VAT rate from 11% to 12% will apply only to luxury goods and services that are the subject of luxury sales tax and are consumed by those with higher income, such as private jets, yachts and luxury homes,” Prabowo said.Prabowo said the government will still move forward with planned support measures intended to soften the blow from the VAT hike, worth 38.6 trillion rupiah ($2.40 billion), which include electricity discounts and other tax breaks.($1 = 16,090.0000 rupiah) More