Fund managers who bet on the 20% rise in US stocks last year are now shouting: Cash is king!

Investors may need to be careful after the S&P 500 has risen more than 20% for two consecutive years.

Dan Niles, founder of Niles Investment Management, said in a conference call on Tuesday that he expects the stock market to fall sharply in the future and use cash as the first choice for 2025.

“My prediction range for the 2025 S&P 500 index is 10% (with inflation under control and corporate profits up 10%) to a 20% drop (with rising inflation and shrinking valuations), which is one of the broadest ranges I can remember,” the fund manager wrote in an X post.

Niles pointed out that in 2022, when the S&P 500 index fell 19%, cash was his first choice. He said, “Money market funds currently have a guaranteed yield of 4%. Given my concerns about the performance of US stocks in 2025, I believe this is a reliable return, and if the market is sold off, this can preserve dry powder for investors,” he said.

Money market funds invest in cash instruments, such as 3-month treasury notes, to withstand market fluctuations. The yield on US 3-month treasury notes is slightly less than 4.3%, but it will be above 5% for most of 2024.

Niles said, “My biggest concern is that inflation will be reignited at the end of 2025 and that the Federal Reserve will need to raise interest rates because strong US consumers and pro-growth US fiscal policies may lead to inflation. So my goal is to continue adapting to the market's response to new data in 2025.”

Niles believes that the possibility that the Federal Reserve will keep interest rates unchanged or raise interest rates until the end of 2025 is close to 50%. “So, just like in 2022, investors may see both stocks and bonds fall if concerns about a return to inflation in the 70s increase,” he wrote.

A year ago, Niles predicted that the S&P 500 would rise 20%, provided the Federal Reserve could achieve a soft landing. According to him, this has already been achieved, so the index closed up 23% last year.

He believes that US stocks are currently very expensive, and pointed out that the expected price-earnings ratio of the S&P 500 index is 25 times, while the historical average is 19 times. “A large part of the historically higher valuation premium can be attributed to the 10-year US Treasury yield, which is currently 4.6% compared to 5.8% historically when the CPI was this high,” Niles said.

He warned that if the incoming Trump administration tries to issue more long-term US Treasury bonds, the yield may be higher, putting pressure on stock market valuations.

US stocks will begin earnings season next week, and Niles is cautious about the company's performance guidelines for the first quarter of 2025. His concerns include: first, “the most expensive US election in history, and no Olympic benefits” may lead to a decline in advertising in the first quarter of this year; second, the postponement of Easter, which dragged down consumer spending and advertising spending in the first quarter; third, the dollar strengthened at the end of 2024, and 30% of the revenue of the S&P 500 companies came from the international market.

Other factors that may drag down the stock market include the risk of inflation brought about by the new administration's possible measures on immigration, tariffs, tax cuts, and deregulation. Niles also believes that artificial intelligence will enter the “digestion phase” by mid-2025.