- Stocks are bound for another strong year, but not every sector is poised to gain, Wells Fargo said.
- Scott Wren, the bank’s senior global market strategist, sees muted returns ahead for defensive shares.
- The bank’s strategists are more bullish on cyclical, interest rate-sensitive stocks, he added.
The stock market is on track for strong gains for investors in 2025, but there’s one area that investors should steer clear of, according to Scott Wren, senior global market strategist at Wells Fargo.
Wren, who had been calling for a recession and was bearish on equities earlier this year, said he’s forecasting a bullish backdrop for stocks in 2025, predicting the S&P 500 could rise to 6,600 by the end of next year. That implies a 10% gain from the index’s current levels, which will largely be fueled by a resilient US economy and falling interest rates, he said, speaking to The David Lin Report on Monday.
Inflation has likely bottomed in the near-term, but could trend closer to the Fed’s 2% target in the coming years, Wren added. He predicted that the Fed could cut rates another 100 basis-points, and that GDP growth could remain solid at around 2.5% next year.
“I think in that kind of situation, when you think that inflation — it might not be exactly where the Fed would like to see it, but it’s not going to be all that high — I think there’s going to be a good reason to be overweight equities and look for good returns next year,” Wren said.
That’s also a good reason for investors to avoid one sector in the market: defensive stocks, Wren said.
“What we’re trying to do — and we’ll certainly do more of it if we see a decent pullback in the market — is we want to step more into cyclical sectors that are sensitive to the economy here at home and the economy abroad. So anything but defensives,” he added, noting that the bank foresaw muted returns in areas like utilities, healthcare, and consumer staples.
Some market commentators have forecast big gains in defensive sectors like energy and utilities, which are thought to be some of the biggest beneficiaries of the artificial intelligence boom.
“With all these data centers and AI and all that, utilities are going to benefit to some extent, but right now, and in the intermediate term, their earnings are not going to be that sensitive — and they never are — to a recovery in the economy,” Wren said. “So you have to ask yourself: Which of these sectors, which companies are going to benefit in terms of earnings growth in a better economy?”
Wren pointed in particular to financial stocks, which will benefit from rising loan demand and declining interest rates, as well as large-cap stocks, which tend to have better cash flow, access to credit, and more products to offer consumers, he said.
Wall Street is feeling optimistic about 2025, particularly against the backdrop of some of President-elect Donald Trump’s pro-market policies. Forecasters, though, generally expect gains to be more muted compared to this year, with the S&P 500 up 26% in 2024.
Deutsche Bank’s outlook this week predicted the benchmark index could rally another 17% to 7,000 next year, thanks to improving risk appetite among investors and a pick-up in business activity.
