My 2-decade-old market models and my data-intensive AI models basically agree that the U.S. stock market will probably perform fairly well over the next half year with a gain of roughly 6%. The newer models have a few extra worries for the next month or so than the old timers; even so, they are positive/flat. This could change suddenly, of course, if the Government shutdown continues very long — your guess on that is probably as good as mine. Also, I have no idea what the immediate market response would be if the Supreme Court shuts down the legally questionable parts of the Trump tariffs. Again, your guess is as good as mine and my models are silent on the subject.

Overall, the U.S. stock market continues to be split: the AI-supercharged Magnificent 7 stocks are still surging and the established market keeps performing a bit below normal expectations. Right now, the S&P 500 is about 8% above my long term trend line. Last round, it turned south when it reached 10% above trend. (The trend line has been rather reliable for the past few years.)

There is a real split between short-term stock market expectation indicators and long term expectations. Short-term indicators like current stock market index trends and several leading indicators (like the Sahm Rule) have been rather steadily positive. It is as if stock market ’emotion’ has been inoculated in some way so that it no longer gets jarred by erratic moves by the White House. Professional economists, however, are less positive looking forward. In the most simple sense, on one hand they see bad news coming, and on the other hand they see bad news coming. The actual impacts of the Trump tariffs are critical. If tariffs do, indeed, produce a ton of revenue, that means a net reduction in government overspending/stimulus and so a drain on the economy. The other option is that the tariffs don’t actually reduce the deficit significantly — heading the U.S. toward a debt crisis.

By Halloween we should see if stock market investors will continue to keep “whistling past the graveyard”. Expect fewer chocolates this year if the tariffs remain intact.

My stock market forecasting tools are still blessed by not being able to read the daily newspaper. My hometown Washington, DC is essentially under martial law with gun-toting National Guard troops patrolling the streets reacting to a trumped-up ’emergency’ that does not exist, but my stock market performance models (except for September) remain reasonably positive. The forecasting models, with an excellent long term track record, indicate that a wide swath of U.S. economic data is basically benign and so the U.S. stock market will probably perform fairly well over the next 6 months. The September exception is that the S&P 500 (^GSPC on the chart) looks like it has gotten ahead of itself. Both my 18 year-old models with about a dozen economic variables and my current data-intensive models reach similar conclusions.

The macroeconomic data remains positive. Unemployment is still just 4.2%; money supply is growing at a 4% annual rate; inflation, only a bit higher than the Federal Reserve wants, is 2.7%; and corporate profits as of last quarter are growing mildly. Leading economic indicators generally are modestly positive with very low probabilities of a near-term recession.

The stock market division between highflyers like Nvidia versus the rest of the world decreased last month. As the graphs below show, the S&P 500 (NVDA accounts for 8% of the index) is now just 5% above its long term GDP-based trend line, and the equal weight version of the same stocks (SPXEW) is now exactly at the long term trend line.

I have a hunch that September will show stock market indecision, but volatility could easily shoot up toward the end of the month and into October. First, the question of the basic legality of the Trump tariffs will wind its way through the courts, eventually through the Supreme Court. Second, there is a significant chance of a U.S. government shutdown at the end of September since the FY2026 budget will probably need some measure of Democrat approval. And third, there is increasing concern over Trump’s health. (The helicopter flight path from the White House to Walter Reed Medical Center goes directly over my house.) I find a bit of comfort with the thought that the stock market, having weathered so much back and forth uncertainty in the Trump second term’s first months, may have been inoculated from instant major responses to potential new calamities. Wishful thinking no doubt.

My models for various US stock market indexes are surprisingly positive for the first half of 2025: flat to negative for January, but then generally rising over the next 6 months. The forecast for the NASDAQ 100 ( ^NDX) is strong. My older monthly-based models for the S&P 500 and the ValueLine Arithmetic Average are not as encouraging, just flat for the coming half year.

The models reflect a strong macroeconomic picture. Gross Domestic Product is robust, running about 2% above the Real Potential GDP model maintained by the Congressional Budget Office. Inflation for consumers and industrial commodities is down, so the Federal Reserve has shifted from trying to restrain the economy to a more neutral stance. Interest rates are high-ish compared to the past half-decade, but rates are modest compared to the past half-century. Crucially, long-term interest rates have finally climbed above short-term rates; that is a good thing as it gives the financial sector room to breathe. Money supply if easing a bit; that’s always nice. Corporate profits remain strong. Several indicators say prospects for a near-term recession are minimal. Unemployment at 4.1% has crept up slightly, but is historically good. We are on the leading edge of major technological change through Artificial Intelligence, and already there are huge new capital investments underway with prospects for more to come. The stock market has scored up the best two-year returns since 1998! What’s not to like?

Unfortunately there are three problems that eventually will slam the stock market. The only real question is: When?

First, the US economy is only glowing brightly because of huge and unsustainable federal government budget deficits, not mainly through real intrinsic growth. Second, even if the economy was not propped up unrealistically, the market is still way over-priced by nearly all traditional valuation measures. Third, all other industrialized countries are going through the same process of cutting covid-related government deficits. Already, the parliaments of Germany, France and South Korea have fallen because there were no agreements on budgets going forward. Bond markets are starting to worry.

And, it is totally unclear what the U.S. Congress is going to do about the budget this spring. Will the deficit shrink or will it explode in size? Unknown. Aside from that, everything is great, and it doesn’t seem like the world is ready to explode this month.

I recalibrated my long-term trendlines for the S&P 500 and the Equal Weight S&P 500. The recalibration better recognizes the impacts of inflation on the market. The modified trendlines have a slightly better fit with the past 4 decades of market behavior. The good news is that according to the new trend lines the S&P 500 is somewhat nearer to trend and the Equal Weight S&P 500 is actually slightly below trend.

Happy New Year!