As the year draws to a close, many financial institutions are beginning to make their forecast for 2025, with Goldman Sachs and Morgan Stanley, for example, predicting an S&P 500 of 6,500 points by the end of next year.
However, the financial consensus is often wrong, as experts tend to adopt mainstream perspectives and avoid unpopular opinions. This "groupthink" phenomenon leads to a uniform but frequently inaccurate forecast.
For example, in 2022, the consensus expected stable economic growth and controlled inflation, even though there were already signs of rising inflation. The war in Ukraine further disrupted supply chains, spiking inflation and forcing the Federal Reserve into aggressive rate hikes, which led to an 18.2% drop in the S&P 500 and caught many investors off guard.
Historical events such as the Great Depression, the dot-come bubble of the 2000s, and the 2008 financial crisis crisis illustrate how consensus predictions often fail to anticipate major crisis. For 2025, forecasts are especially not divided on the direction of the US economy. It will go higher. This certainty has led some investors to adopt "contrarian" strategies that involve betting against dominant forecasts.
The "contrarian" strategies include investing in inverse ETFs, which aim to deliver returns opposite to traditional market indices, and "fallen angel" bonds, which focused on devalued but potentially undervalued assets.
Additionally, funds have even been launched to bet against recommendations from personalities like Jim Cramer from CNBC, though this approach remains risky.
In summary, while the consensus is a common benchmark, it's often falters in the face of economic and political surprises. The year 2025 might not be different as the consensus is particularly united, offering investors a broad range of opportunities, whether they choose to align with it or bet against it.
However, contrarian investing requires thorough analysis and a tolerance for uncertainty. Yet this approach can prove rewarding in an unpredictable economic landscape.
