- Stocks will rally higher through the end of next year, according to Capital Economics.
- Any ongoing stock bubble is nowhere near levels seen in 1929 and 2000, suggesting further upside ahead.
- Meanwhile, the Fed could cut rates more than investors are anticipating, the firm said in a recent note.
The S&P 500 will keep soaring until at least 2026, as the rally in stocks doesn't look over and the Fed is poised to slash interest rates way more than expected, according to Capital Economics.
Economists at the research firm predicted the S&P 500 would soar to 6,500 by the end of 2025, implying a 26% increase from its current levels.
That's contrary to what more bearish commentators have said, with some market gurus warning of an imminent stock correction as the S&P 500 mirrors other historic bubbles.
But stocks just don't look as overvalued as they have in previous periods, Capital Economics said. Shiller's S&P 500 Excess CAPE yield, which shows the valuation of stocks relative to bonds, still isn't at levels seen during the 1929 and dot-com bubble, a sign that stocks could rise "quite a lot more."
"We expect 'risky' assets, especially equities, to continue to outperform 'safe' ones over the next couple of years, as a bubble continues to inflate in the stock market," economists said in a note on Thursday.
The Fed, meanwhile, is expected to cut interest rates soon — and cuts will likely run a lot deeper than markets are expecting, the firm said. The Fed could issue its first rate cut in June, and end up cutting interest rates 200 basis points by mid-2025, the firm estimated, more than what markets have already priced in.
"With the economy holding up well, there is a risk that they stand pat until July. That said, we are still expecting more rate cuts than investors do," economists added.
Markets have been waiting for rate cuts for more than a year, as lower interest rates loosen financial conditions and can boost risk assets like stocks. Fed officials have projected 75 basis points of rate cuts in 2024. Investors, meanwhile, are pricing in a 65% chance the first cut could come by June, according to the CME FedWatch tool.