2025 is right around the corner, and all signs point to it being a wild one. A new U.S. President takes office on January 20 and is pledging to raise tariffs on virtually all other countries, including Canada. That alone is enough to make for some interesting market dynamics. Additionally, we are heading into the New Year with a historically pricey market, with the U.S. “Magnificent Seven” stocks trading at around 60 times trailing earnings.
It could be a volatile market in the year ahead. With that said, not all market sectors are likely to be affected evenly by the volatility. The sectors that look the most vulnerable right now are those that gained the most in the last cycle, specifically big tech stocks. More overlooked sectors have better prospects. In this article, I will share three bold predictions for the stock market in 2025.
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Prediction #1: Value outperforms growth
My highest conviction prediction for the stock market in 2025 is that value stocks will outperform growth stocks for the year. I have several reasons for thinking that this will happen. First off, it happened in 2022, following 2021 market conditions that looked very similar to the ones we have today (i.e., tech leading, everything else lagging). Second, growth stocks, especially large ones, are trading at very high multiples. Third and finally, it is normal in market cycles for one category of equities to come into favour while another falls out of favour. For these and other reasons, I expect value stocks to outperform growth stocks in 2025.
Prediction #2: International outperforms the U.S.
Related to my first prediction is my second prediction: that international stocks will outperform U.S. stocks in 2025. This prediction is arguably an extension of the first one, because international stocks (I mean non-US stocks including Canadian stocks) are cheaper than U.S. stocks.
Consider The Toronto-Dominion Bank (TSX:TD) for example. It’s a Canadian bank stock that is far cheaper than its U.S. big bank cousins, trading at 9.6 times earnings, 2.9 times sales and 1.1 times book value. The big U.S. banks by contrast trades at around 15 times earnings on average.
One thing that TD Bank has going for it right now is a very high dividend yield. The stock pays $1.05 in quarterly dividends, which works out to $4.20 per year. The stock price as of Thursday’s close was $74.80. The dividend is expected to be maintained through the next year. Therefore, TD’s forward dividend yield is 5.6%. That’s far higher than the yield you’ll get on large U.S. bank stocks today.
Prediction #3: AI stocks enter bear market
Last and perhaps most provocatively, I think that the big U.S. AI stocks will enter a bear market or at least a correction next year. Some of these stocks are extremely expensive, trading at 60 times earnings or more. In fact, the Magnificent Seven as a whole trade at 60 times trailing earnings, thanks mainly to NVIDIA and Tesla (the others trade at around 35 times earnings on average). These kinds of multiples tend to be followed by cooling-off periods, and I expect such a period to begin next year.
