No Need to Update My Forecast, It Was Right the First Time

May 27, 2025
By Robert Wiedemer

All Across Wall Street, Analysts and Economists are Madly Changing Their Forecasts for the Market and the Economy

After the announcement of a trade deal with China, the market has been on a tear.  In fact, NASDAQ has entered a bull market (up 20% from its recent low).

As such, Wall Street economists and analysts from Morgan Stanley to Goldman Sachs to JP Morgan are changing their forecasts to look much more like my March 10 forecast for the year: The Tariff Trauma would end in a few months, there will be no recession and a solid increase in the stock market by year end – certainly no stock market collapse.  And no big decrease in interest rates. 

Let’s take a look at some of the specific issues the market is facing now and how the rest of my forecast is playing out.

Moving on to the Big Tax Cut Legislation

As I expected, we are moving past the Tariff Trauma and onto the big tax cut legislation.  The legislation moved faster than I expected through the House, having been approved before Memorial Day, but will face delays in the Senate.  Overall, I hold to my earlier forecast of a bill being passed this summer. 

You might say that the Tariff Trauma isn’t over yet, with President Trump announcing a 50% tariff on the European Union, which is our biggest trading partner.  You would be right since this is another shot in the tariff war, but the stock market is moving past the trauma.  Despite a big drop at the market open after the announcement, the market slowly recovered most of its losses by the end of the day. 

The market is now expecting, as I expected with China, that Trump will likely make some sort of deal to reduce the EU tariff.  The political pressure from his supporters to make such deals is enormous.  Plus, Trump likes to win and winning the upcoming Congressional election is high on his list of important wins.  The past Tariff Trauma has made that harder, but Trump certainly hasn’t given up on that very important election which will greatly impact his presidency. 

Interest Rates Not Going Down

Despite the hopes of many Wall Street forecasters, there will be no recession that pushes down interest rates, as I said earlier this year and accurately predicted many times over the past couple of years.  Their hopes of saving real estate and bonds with lower rates this year are quickly going up in smoke.  The 20 year bond ETF, TLT, is down 3.5% year to date.   That bond ETF is now down 48% over the past five years making US government bonds a really stinky investment that continues to stink.  So, it’s no surprise that foreign interest in US bonds is falling with both Japan and China selling bonds in the first quarter.

As for real estate, it’s not looking good either.  Commercial real estate construction is collapsing for office buildings, which are now routinely selling (when they sell) at discounts of 50% to 70% in major cities such as Washington DC.  In fact, according to the Newmark Group, the amount of office space under construction has fallen from 123 million square feet in Q4 2019 to 31 million square feet in Q1 2025, a 75% decline.  Even worse, the amount of office construction started in Q1 2025 was only 2.8 million square feet.  That’s the definition of a total collapse.

In addition, the hoped for rebound in home sales has not materialized.  In fact, April saw sales of pre-existing homes fall to levels not seen since the Financial Crisis of 2008-09.  And the future is not looking good since the number of US adults who think now is a good time to buy a home has fallen from 53% in 2021 to 26% today according to a recent Gallup poll.

So, the investor focus for the rest of the year, as I predicted earlier, will be on stocks, which will very likely outperform foreign stocks again this year as they did last year.

The Fed Is Further Reducing Its Efforts to Destroy Money to Keep Long Term Rates from Rising Too Much

When the Fed sells bonds, it is effectively destroying money to reduce the huge amount of money printed during the Covid Crisis.  By destroying money, the Fed is putting upward pressure on long term rates by reducing the supply of money.

However, over the past year, the Fed has continually reduced the amount of money it is destroying.  First, last June, it reduced the amount it destroys from about $80 billion a month to $60 billion.  A few months ago, it reduced that target further to about $35 billion a month. 

Over the last two months it actually only sold about $25 billion a month – a further reduction.  The Fed has said these reductions are temporary, but I think this is part of a longer-term trend.  I think President Trump will appoint a money printer as Fed Chairperson next May who will likely continue these efforts to keep long term rates from rising, including eventually printing money to keep rates from going above 6%. 

So, when you hear economists fretting about how we are going to handle bigger government borrowing and waning foreign and domestic investor interest in buying government bonds, that will be solved simply by printing more money.  Which is exactly what we have done before.  

However, nobody on Wall Street wants to talk about that solution.  It’s scary. They would rather talk about big problems for stocks from interest rates going way up or, as always, a recession that will push rates down.  Neither of those scenarios are going to happen.

Yes, in the near term, interest rates could go up a bit from 4.5% currently, despite the Fed’s modest efforts to keep them down.  Rising interest rates will hurt stocks.  However, stocks will adjust to small rate increases and I would be surprised if long term rates go much above 5% this year.  If they do, expect the Fed to go into money printing mode even before we see a new Fed Chairman next May.

Deficit Update

As of April (7 months into the fiscal year) our deficit is up 23% from the same time last year.  That puts us on a trajectory for a whopping half trillion dollar increase from $2 trillion last year to $2.5 trillion this year!  That will provide plenty of fuel for economic growth this year.  However, even if the deficit doesn’t increase at all this year, it still provides a huge 6.5% boost to our GDP.