Outlook Public Equity
Disclaimer: The information and materials prepared are for internal use only and on how the Dancap Family Investment Office (“Dancap”) views current market dynamics. Dancap does not guarantee the accuracy or completeness of the material and it is not intended in any manner to be investment, financial, legal, accounting, tax or other advice and should not be relied upon.
Dancap's Public Equity Markets Outlook
February, 2025
Dancap has a significant track record of investing in public equity strategies through third-party managers. Our strategies are actively managed, tax-optimized, and structured as managed accounts offering daily liquidity and full transparency. This market overview highlights Dancap’s current public equity strategies by geographic allocation and provides an update on market dynamics, outlook, and risks.
The majority of Dancap’s public equity strategies are allocated to managers specializing in US large-cap stocks. With our strategies held in managed accounts, we monitor holdings daily and benchmark performance against appropriate indices. A smaller portion of our public equity holdings is allocated to third-party managers focusing on non-US large-cap companies with significant long-term growth potential. In all cases, we partner with managers who demonstrate the ability to consistently generate alpha and outperform their respective benchmarks, net of fees. Our strategies aim to deliver minimum net annual returns of 10% on an absolute basis.
US Strategy
The S&P 500 ended the calendar year 2024 with a 23% gain, following a 24% increase in 2023. According to Goldman Sachs, this marked the first time since 1998–1999 that the index achieved back-to-back annual returns exceeding 20%. Of the 23% total return in 2024, 11% was attributed to earnings growth, while 12% resulted from P/E multiple expansion, with valuations rising to 21.9x from 19.5x. The “Magnificent 7” (which represent 35% of the S&P 500’s market capitalization) contributed just over half of the total returns, with NVIDIA alone accounting for 20% of the index’s overall gain. Despite the significant contribution of large-cap technology companies, market breadth in 2024 remained healthy. Goldman Sachs noted that two-thirds of the stocks in the index finished the year with positive returns, and all sectors except Materials—which represents only 2% of the S&P 500’s market cap—posted gains for the year.
Mike Wilson, Chief Equity Strategist at Morgan Stanley, observed that Treasury interest rate sensitivity has reemerged as a key driver for equity markets. In December 2024, the correlation between the 10-year Treasury yield and equity performance turned sharply negative as the Federal Reserve shifted to a less dovish stance, with the 10-year yield surpassing 4.5%. Bloomberg’s consensus forecast anticipates the 10-year Treasury yield will end 2025 at 4.6%. This dynamic is an important consideration for Dancap as it evaluates its public equity holdings in the year ahead.
Source: Morgan Stanley – US Equity Strategy Report; January 6, 2025
Investors concerned about elevated inflation levels should note that, contrary to popular belief, the best hedge against inflation (as measured by US CPI) is not gold but U.S. public equities and real estate. Over the long term, U.S. equities have consistently delivered returns that exceed inflation. Specifically, since 1926, U.S. public equities have outperformed inflation 100% of the time over any 20-year investment horizon. This is due to companies’ ability to adapt to inflationary pressures by increasing prices, maintaining profitability, and driving growth.
Source: Goldman Sachs Wealth Management – Investment Strategy Group
US Outlook
Wall Street remains broadly optimistic about the S&P 500’s performance in 2025, with an average year-end price target of 6,539, representing an 11% gain from the December 31, 2024, closing level of 5,882. Analysts anticipate that returns will be primarily driven by earnings growth, with next-twelve-month EPS projected to rise by 7.5%, from $268 in 2025 to $288 in 2026. Additionally, forward price-to-earnings (P/E) multiples are expected to expand modestly by 3%, from 21.9x currently to 22.6x by year-end 2025.
Price targets from major banks generally range between 6,400 and 6,700, with the highest forecast, 7,000 – set by both Wells Fargo and Deutsche Bank- suggesting a potential 19% return. Notably, even Morgan Stanley’s typically bearish Chief Investment Officer, Mike Wilson, has set a year-end 2025 target of 6,500 (+10%). Wilson cites several factors supporting a bullish outlook, including anticipated interest rate cuts by the Federal Reserve, improving economic growth, and the potential for a wave of deregulation under the incoming Trump administration.
US recession risk remains a key concern for investors, as economic indicators present mixed signals about the likelihood of a downturn. Goldman Sachs assigns a 15% probability to its bear-case scenario, which envisions a US recession leading to the S&P 500 declining to approximately 4,750 – a 15% drop from December 31, 2024 levels. This projection aligns with historical patterns of market corrections during recessions, driven by contractions in corporate earnings, reduced consumer spending, and tighter credit conditions. While this is not the base case for most analysts, it highlights the importance of monitoring economic data closely.
European Outlook
The STOXX Europe 600 index is projected to deliver approximately 8% returns in 2025, supported by moderate earnings growth and valuation expansion. Sectors such as healthcare, technology, and retail are expected to outperform, driven by strong structural growth trends and their relative resilience to macroeconomic challenges. European GDP growth is anticipated to remain stable at 1% in 2025, up from 0.7% in 2024. The European Central Bank (ECB) is expected to adopt an accommodative monetary policy, implementing four 25-basis-point rate cuts over the year, bringing the effective ECB rate down from 3% to 2%. Easing inflationary pressures are likely to provide the ECB with greater flexibility in supporting economic activity.
Goldman Sachs notes that European equities are trading at a 54% discount to U.S. equities on a price-to-earnings (P/E) multiple basis, significantly wider than the historical average discount of 28%. This valuation gap is attributed to structural market differences, particularly sector composition. The U.S. market’s heavy weighting in high-growth sectors like technology, which typically command higher P/E ratios, contrasts with the European market’s greater exposure to traditional, lower-growth sectors such as energy and financials. While sector adjustments can narrow the valuation gap, they do not fully close it, presenting a compelling relative value opportunity in European equities.
To see the Dancap Public Equity Investment Criteria and Portfolio, please click here.