2025 Outlook from NDR’s Ed Clissold

Join Ed Clissold, Chief U.S. Strategist at Ned Davis Research, as he dives into the key market drivers shaping the U.S. economy in 2025. Ed explores how shifting economic trends are influencing investor strategies and the broader market landscape.

Summary – IBKR Podcasts Ep. 227

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Jose Torres 

Hello, everyone, and welcome to today’s edition of the Interactive Brokers IBKR podcast. With me today is Ed Clissold, Chief U.S. Strategist at Ned Davis Research (NDR). Ed and his team are responsible for the firm’s U.S. equity style, sector, and equity theme analysis. They use a combination of top-down macroeconomic and fundamental research and bottom-up analysis of factors specific to asset class, market cap, style, sector, or theme. 

His team also provides in-depth macro research on fundamental topics such as earnings, dividends, and cash flow. We’re thrilled to have him with us today. Welcome, Ed! 

Ed Clissold 

Thanks for having me. I’m excited to be here. 

Jose Torres 

Great! So, as the U.S. strategist, where do you see the market heading this year? 

Ed Clissold 

We have a year-end target at 6,600, which was about a 9% increase when we first put it out. It’s a healthy outlook, but I think the nuances are crucial here. This year, we’re focused on what could derail the bull market because we’re over two years into it. 

We’ve been overweight U.S. stocks in our asset allocation for quite some time. So now, the key question is: what could disrupt this trend? The main drivers of the bull market—disinflation, earnings acceleration, and technicals—are still in place. These factors continue to support U.S. equities. 

However, I do have concerns about how long they’ll remain intact throughout the year. It’s possible that we overshoot the 6,600 target in the first half and then pull back later on. We can dive into those concerns in more detail if you’d like. 

Jose Torres 

As a consumer of your research, I always pay attention to where you’re underweight and overweight. I’ve noticed that you’ve been overweight U.S. stocks for a while, which has been valuable insight. Over the last two years—2023 and 2024—returns have been just under 25%. This year, you’re expecting something milder, in the 8% to 9% range, as you mentioned earlier. 

What could go wrong with that framework? 

Ed Clissold 

 
Good question. Let’s break it down by those three pillars, starting with disinflation. The market bottomed in late September or early October of 2022. That was shortly after the August CPI report showed the six-month average CPI falling. Conceptually, it made sense—once disinflation gained momentum, the market rode that tailwind. 

About a year ago, concerns arose as CPI reports came in hotter than expected. The Fed fund futures market shifted from pricing in six or seven rate cuts to zero. Eventually, we saw around 100 basis points of cuts. Inflation did come down enough to allow those cuts, but as we move into the second half of this year, things could get trickier. 

If you break core CPI into three components—goods, housing, and services (or “supercore”)—the supercore has been quite sticky and isn’t expected to decline much. Housing is particularly interesting, especially multifamily housing, like apartment complexes. It takes about three years to build a complex, so we have good visibility on supply. We’re nearing the end of absorbing the units built during the early pandemic. As higher rates slowed new development, the supply pipeline has thinned out. This could lead to housing inflation ticking up. 

Goods inflation, on the other hand, has returned to pre-pandemic trends of importing deflation. Core CPI and PCE have hovered around -0.5% to -1% year-over-year for the last 12 months. However, trade policies like tariffs could shift that dynamic. If both goods and housing inflation rise, CPI might edge back toward 3%. The Fed would then face tough decisions in that environment. 

We expect a few rate cuts—perhaps one per quarter in the first half of the year—but if inflation surprises to the upside sooner, it could disrupt the market. 

Jose Torres 

 
That’s interesting. It doesn’t sound like an environment where earnings would weaken or lose momentum. If inflation risks lean upward, earnings may stay buoyant, which has historically supported equity markets. 

Ed Clissold 

 
Exactly. That leads to the second pillar: earnings. Over the past six quarters, we’ve seen strong earnings acceleration. The market loves earnings growth, but it really loves acceleration—when growth is faster than the prior year. Much of this has been driven by the “MAG 7” (seven major tech stocks). However, as we move into 2025, those companies may struggle to sustain triple-digit growth. They’re likely to slow down, with expected earnings growth dropping from 54% to around 38%. 

Meanwhile, the other 493 S&P 500 companies are forecasted to improve from -2% to around +6% to +8%. The question is whether they can pick up the slack if the MAG 7 decelerates. 

Economic conditions will be crucial. Severe earnings recessions typically occur during economic downturns, when sales growth turns negative, and fixed costs compress margins. That’s not what we’re seeing right now. Inflation and pricing power will also play a role. During the pandemic, companies successfully passed on higher costs, maintaining margins. But with pandemic savings dwindling and unemployment edging higher, that might not be as easy this time. 

Overall, the odds of earnings remaining supportive through 2025 are good, though they could shift from a strong tailwind to a modest headwind. 

Jose Torres 

 
You mentioned that companies outside the MAG 7 are expected to post earnings growth. Do you think that’s due to their leverage to domestic conditions, including policies from the Trump administration, like lower taxes, lighter regulations, and a focus on domestic manufacturing? 

Ed Clissold 

 
Possibly, though I doubt many bottom-up analysts are factoring those policies heavily into their forecasts. There’s some upside risk if those measures gain traction. However, much of this is about timing. Many non-MAG 7 companies have faced earnings stagnation and are now poised for recovery. 

Interest rates are another factor. The MAG 7, with their long-term debt and high cash flows, benefited from the inverted yield curve. Smaller companies didn’t have that advantage, so rate cuts could provide them some relief. 

We’re already seeing signs of improvement. Among S&P 500 companies, 40% have reported earnings so far, with a beat rate of around 78%—up from the low-to-mid 70s in recent quarters. In the S&P Small Cap 600, the beat rate is around 69%, the highest in over two years. 

This suggests opportunities for a potential rotation away from the MAG 7. 

Jose Torres 

 
Why didn’t the Treasury issue more long-term debt when rates were near zero in 2020 and 2021? 

Ed Clissold 

 
I’ve wondered the same thing! Why not issue a 50- or even 100-year bond? Argentina managed it. The Treasury likely focused on where demand was—primarily at the short end of the curve. But if they had issued long-term debt, I fear Congress might have seen it as an excuse to spend more. 

Jose Torres 

 
That’s a fair point. We actually discussed this with Steve Moran, now Chief Economist of the Council of Economic Advisors, and Nouriel Roubini. They argued that there simply wasn’t enough demand for long-term bonds at low yields. This helped dampen volatility and allowed for strong market performance in 2023 and 2024. 

Shifting back to stocks, why are slow-paced rate cuts bullish, while an extended pause is not? 

Ed Clissold 

 
Historically, once the Fed starts cutting rates, markets tend to react positively. There’s a saying: “Three hikes and a stumble; two cuts and a jump.” However, not all easing cycles are created equal. We’ve identified 16 cycles since World War II, dividing them into “slow” (four or fewer cuts per year) and “fast” (five or more). 

Fast cycles tend to occur when the Fed is behind the curve, leading to worse market outcomes. Examples include the 2008 financial crisis and the early 2000s dot-com bubble burst. In contrast, slow cycles—like 1995, 1998, and 1984—have been much more favorable, with markets up about 24% on average in the first year. 

The key is that in slow cycles, the Fed can methodically monitor inflation and growth, cutting rates as needed. This controlled approach supports both economic stability and market growth. 

Jose Torres 

 
You also mentioned the potential for a rotation away from the MAG 7. How do current valuations compare to past eras like the dot-com bubble and the Nifty 50? 

Ed Clissold 

 
Great question. Growth investing has dominated for decades, driven by structural shifts in the economy. In the manufacturing-heavy era studied by Fama and French, recessions were frequent but short, rewarding value stocks quickly. As the economy became more consumer-driven, recessions became less frequent but longer, favoring growth stocks. 

The MAG 7 now accounts for 39% of the S&P 500’s market cap—higher than the dot-com era (30%) and the Nifty 50 era (34%). However, these are highly profitable companies, unlike many dot-com names. Still, no company’s dominance lasts forever. At some point, creative destruction will take its toll, and we may see a meaningful rotation. 

The equal-weight S&P 500 has been range-bound versus the cap-weighted index for six months, suggesting early signs of this shift. The Russell 2000 value index, for example, held up much better than growth during the 2000–2002 bear market. 

There will always be opportunities in the market. It’s just a matter of being prepared for rotations when they happen. 

Jose Torres 

 
Ladies and gentlemen, that was Ed Clissold from Ned Davis Research. Thank you, Ed, for joining us today. 

Ed Clissold 

 
Thanks for having me. 

Jose Torres 

 
Folks, don’t forget to like, subscribe, and review the Interactive Brokers podcast. Thanks for tuning in. See you next time! Bye!