A new stock market ‘correction’ could be on its way next year, but this time, shares could be set to surge rather than collapse. Don’t forget corrections can occur in either direction. And even after the markets enjoyed a double-digit rally in 2024 so far, that performance could be just the tip of the iceberg. Here’s why.
All eyes are on the Bank of England
Last month, the Bank of England (BoE) introduced the first interest rate cut since inflation started going wild a few years ago. That’s because economic conditions have changed over the first six months of the year. And since inflation has continued to stay relatively cool, another rate cut announcement is expected at the next meeting later this month (19 September).
That’s terrific news for investors. After all, lower interest rates increase access to capital, enabling businesses to grow and share prices to climb. Yet lately a common theme appears to be emerging among some FTSE industries.
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Sales and earnings at many stock market companies have actually started to slow down. Some may even miss full-year guidance despite the improved economic landscape. What’s going on?
The International Monetary Fund (IMF) has recommended UK interest rates fall to 3.5% by the end of 2025. Other analysts have been a bit more bullish, suggesting rates be cut even faster. Regardless, the trend is clear – barring any unforeseen catastrophe, rates are going down. And businesses, as well as consumers, have taken notice.
With debt likely to become cheaper next year, projects are being delayed. As such, growth from industry leaders like Howden Joinery (LSE:HWDN) has slowed to a crawl in 2024.
A buying opportunity?
Howden is not the only company caught in this situation. But let’s use it as an example and zoom in. The business specialises in fitted kitchens and, more recently, fitted bedrooms. And it works directly with tradespeople to supply all the materials, designs, and instructions for such projects.
Home renovation isn’t cheap. Neither is new home construction, which Howden has some exposure to. As such, households and homebuilders have equally hit pause on a lot of projects, making top-line expansion rather challenging. Subsequently, in its latest earnings report, revenue only expanded by just over 4% versus its double-digit historical average.
But once interest rates have fallen further, this may quickly reverse, re-sparking growth not just in the property market but in electronics, chemicals, and industrial sectors, among others.
In other words, now might be a terrific time to consider some shares while they’re still cheap. That’s what I’m doing.
What’s the catch?
While investors can act irrationally, the prospect of rate cuts is hardly a secret. It’s been in the headlines throughout 2024. And as a consequence, there’s a possibility that any 2025 growth burst could already be priced into valuations.
If that’s the case, investors may end up reaping returns smaller than expected, especially if the BoE takes longer to cut rates than what the IMF has suggested. But equally, if rates are cut faster without inflation making a comeback, the surprise could send shares flying.
The short-term is notoriously hard to predict, making diversification paramount for keeping risk in check. Nevertheless, as economic conditions continue to improve, 2025 may be a terrific year for the stock market. At least, that’s what I think.
