The U.S. stock market continues to defy expectations, buoyed by the wealth of retiring baby boomers. With the Federal Reserve cautiously easing monetary policy and geopolitical risks proving less disruptive than feared, a roaring bull market remains the most likely scenario.
By reassessing our probabilities for the U.S. economy and markets, we maintain a base-case scenario of the "Roaring 2020s," assigning it a 55% probability. The Meltup 1990s and the Stagflationary 1970s round out our outlook with respective probabilities of 25% and 20%. This article explores the driving forces behind these scenarios, the potential risks, and the significant role of the boomer generation in sustaining economic growth.
Three Market Scenarios: An Updated Probability Outlook
1. Roaring 2020s (55%)
This scenario is fueled by robust consumer spending, a resilient stock market, and a strong wealth effect driven by baby boomers. Retirees are enjoying significant gains in their portfolios and home values, spurring spending and economic growth.
2. Meltup 1990s (25%)
A Meltup scenario could gain traction if monetary policy becomes overly accommodative, driving excessive market exuberance. If the Federal Reserve continues its dovish approach, this scenario may take on increased importance, particularly if economic risks remain subdued.
3. Stagflationary 1970s (20%)
The least likely scenario, this outcome represents the “what-could-go-wrong” bucket. It includes risks such as soaring oil prices, overly restrictive monetary policy, or significant geopolitical disruptions. While these threats persist, recent developments suggest a reduction in their likelihood.
Geopolitical and Policy Factors
Oil Prices and Global Tensions
Despite ongoing conflicts in the Middle East and the war between Russia and Ukraine, oil prices have remained relatively stable. The Biden administration’s recent sanctions on Russian oil exports caused a temporary spike, but the incoming Trump administration’s commitment to boosting U.S. oil production could counterbalance this.
A ceasefire agreement between Israel and Hamas further underscores the potential for easing tensions, which would help stabilize energy markets.
Tariff Policies and China’s Economy
The Trump administration is expected to implement significant tariff hikes, particularly targeting China. While these measures could strain China’s property-driven economy, recent stimulus efforts have helped boost Chinese GDP, industrial production, and retail sales.
Federal Reserve: A Balancing Act
The Federal Reserve has been easing monetary policy since September 2024, a trend that is likely to continue. Treasury bond yields recently declined, signaling that fears of a U.S. debt crisis are receding. However, questions remain about the Fed’s approach.
Federal Reserve Governor Christopher Waller’s dovish stance suggests that the majority within the Fed supports further easing. However, some experts argue that the Fed should avoid overstimulating an already robust economy, particularly as Trump’s economic policies take effect.
The Wealth Effect: A Boomer-Driven Bull Market
Boomers’ Growing Wealth
The wealth effect is playing a crucial role in sustaining consumer spending and market growth. Over the past year, the median existing home price rose 4.1%, while the S&P 500’s market capitalization surged by 24.4%.
Since the COVID-19 pandemic began in March 2020, home prices have climbed 47.3%, and the S&P 500 has gained an astonishing 168.5%. These increases have contributed to a record U.S. household net worth of $168.8 trillion as of Q3 2024, with baby boomers accounting for roughly half.
Spending and Legacy
Retiring boomers are actively spending their wealth, fueling economic growth. This demographic’s impact extends beyond their lifetimes, as much of their remaining wealth will be passed on to younger generations, potentially sustaining the market’s upward trajectory for years to come.
Bull Market Outlook
S&P 500 Targets for 2025 and 2026
With an 80% probability assigned to the continuation of the current bull market, the S&P 500 is projected to reach 7,000 by 2025 and 8,000 by 2026. These targets reflect sustained consumer spending, favorable monetary policy, and the wealth effect’s enduring influence.
Conclusion
The U.S. stock market is poised for continued growth, supported by a strong wealth effect and a robust economy. While risks such as geopolitical tensions and tariff wars persist, they are currently outweighed by the bullish factors driving the Roaring 2020s scenario.
Retiring baby boomers, with their unprecedented levels of wealth, are a key force behind this optimism. Their spending is boosting the economy, while their legacy wealth may ensure market resilience for years to come. Investors should remain vigilant but optimistic, capitalizing on opportunities in this promising economic landscape.
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