The S&P 500 index is set to end 2024 with its strongest edge over global equities in nearly 30 years, a remarkable streak fueled by U.S. economic dominance.
Yet, Bank of America analysts caution that the rally's days may be numbered, predicting a reversal as early as the second quarter of 2025.
The SPDR S&P 500 ETF Trust SPY has surged 25% year-to-date as of Dec. 27, delivering a 21-percentage-point edge over global equities excluding U.S. exposure, tracked by the iShares MSCI ACWI ex U.S. ETF ACWX
That marks the widest outperformance of American versus world equities since 1997.
This is also the widest performance gap since 1997, driven by investor positioning for “Trump trades” of higher U.S. dollar, equities and bond yields, according to Bank of America’s chief investment strategist Michael Hartnett.
Hartnett predicts that an “inflation boom” in the U.S. combined with a “global deflation bust” will drive a first-quarter overshoot in U.S. stocks.
“We believe US small cap (Russell 2000) is the best trade to position for overshoots,” Hartnett said in a recent report.
Hartnett highlighted that global equity markets are heading into 2025 with significantly weak economic momentum, especially in manufacturing – and this is even before factoring in the potential impact of a trade war.
But, as the champagne flows this New Year's Eve, Bank of America analysis suggests a sobering reality may await from the second quarter of 2025.
Chart: S&P 500 Sharply Outperformed International Equities In 2024
A Shift To International Markets?
By spring 2025, Bank of America forecasts a hawkish Federal Reserve and “policy panic” in Europe and Asia to trigger a peak in U.S. market “exceptionalism.”
According to Hartnett a strong U.S. dollar, already near multi-year highs, contributed to U.S. stocks' outperformance but poses risks given that 30% of S&P 500 revenues come from overseas markets.
Hartnett projects that aggressive fiscal easing in China, new European stimulus – boosted by potential German election outcomes – and rate cuts by the European Central Bank will create fertile ground for global equities.
This could lead to significant rotations into international equities and currencies.
"By Q2, we anticipate lower interest rates, cheaper currencies, and fiscal easing in Europe and China," Hartnett said.
Emerging markets, battered by a strong dollar and trade uncertainty, may finally rebound as the greenback loses steam.
David Hauner, head of global emerging markets fixed income strategy at Bank Of America, remains cautious on emerging markets in the near term but sees buying opportunities as U.S. trade policies become clearer and the dollar reaches a turning point.
2025: Volatility And Opportunity
Savita Subramanian, Bank of America’s head of U.S. equity strategy, said potential Trump 2.0 policies could heighten inflation and deficit risks.
“Trump 2.0 may drive higher uncertainty around inflation and deficit risks. Immigration and tariffs may be inflationary, but corporate tax cuts are disinflationary as benefits get passed onto the consumer,” Subramanian said.
She highlighted the prospects for a strong GDP upcycle, driven by lighter regulations and increased energy production lowering oil prices.
Despite predictions of volatility return in 2025, Bank of America analysts remain bullish on the S&P 500.
They indicated an ambitious year-end target of 6,666 for 2025, marking a staggering 10x rally from the market's 2009 lows.
"Volatility will present opportunities to buy the S&P 500 at lower levels in 2025," said Subramanian, adding that the index is likely to close the year higher than current levels.
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