Do it at your own risk! Agency warns: the more optimistic about US stocks, the greater the risk

Investors' optimism about the strong performance of the economy and the stock market in the coming year may be counterproductive, and growth in 2025 may fall short of expectations, according to BCA research.

The research company said in a report on Monday that a risk stemming from “animal spirit” is spreading in the market. This means that investors expect interest rate cuts and economic recovery during Trump's second term, so they are strongly optimistic about the stock market.

However, the BCA said that this optimism may be bad for the market, as the so-called “animal spirit” may increase inflation and cause interest rates to remain high for longer. The company said investors should “enter the market at their own risk.”

Juan Correa, the company's global asset allocation strategist, wrote in the report: “Paradoxically, strong optimism about the US economy is reducing the possibility that economic growth will accelerate again in 2025. Given the high level of optimism in asset prices, this requires a defensive portfolio strategy with an investment period of 12 months.”

Although the inflation rate has declined sharply from its 2022 high, the recent anti-inflation trend has been reversed. According to the Bureau of Labor Statistics, the US CPI rose 2.7% year on year in November last year, up from 2.6% the previous month.

The Federal Reserve is watching the possibility that inflation will become an issue again. According to the Federal Reserve's latest economic forecast summary, 80% of Federal Open Market Committee (FOMC) members said they believe there is an upward risk in core inflation.

Correa added: “Financial market optimism is currently hampering the goals of Federal Reserve Chairman Powell and President-elect Trump.”

Furthermore, the Federal Reserve's interest rate expectations have also begun to rise, which is another risk to the market and economy. The Federal Reserve has drastically lowered its forecast for interest rate cuts this year; it only predicts that it will cut interest rates by 25 basis points twice this year.

US Treasury yields are also rising. Last week, the 10-year US Treasury yield rose to its highest level in nearly seven months.

Correa said that higher US bond yields may indicate that investors have “accepted” the idea that interest rates will remain high for a long time, and may expect a large amount of government stimulus measures if the economy continues to weaken.

But this optimism about stimulus measures is also beginning to backfire on the economy, as high yields tighten financial conditions.

According to Moody's data, in December of last year, the average yield of mature AAA-rated corporate bonds rose to a seven-month high, reflecting the rise in the company's financing costs.

Meanwhile, the job market continues to show signs of slowing down. According to data from the Ministry of Labor, the recruitment rate in October last year was 3.3%, the lowest level in four years.

Correa added: “In our opinion, this optimism is unfounded. The evidence shows that the current level of US Treasury yields is putting pressure on economic activity.”

BCA Research's forecast for the 2025 stock market is the most pessimistic. The company previously stated in a report that it still believes the recession is the basic situation and predicts that the S&P 500 index will close at 4,452 points by the end of the year, down 26% from the index's current level.

Most forecasters expect US stock returns to remain positive, but to a lesser extent.

Investors have become more cautious in recent weeks, especially after the Christmas rally failed to materialize. In the American Association of Individual Investors's latest investor sentiment survey, only 34% of investors said they are optimistic about stocks over the next six months, down from 43% at the beginning of December last year.