Longview's Chris Watling warns US stock market dominance over, bond rally could reverse

Stock markets could bottom in the second quarter of 2025 as a rotation out of risk assets into bonds pushes US 10-year yields down to between 3.5% and 4 % later this year, according to Chris Watling - the founder and chief market strategist at Longview Economics.

In a Livewire Markets interview, Watling said retail or long-term investors should use the share market downturn to buy the dip and average into positions at cheaper prices as he does not expect a multi-year bear market. 

This is partly on the view he now expects the US Federal Reserve to cut interest rates four times this year to offset a potential contraction in the world's largest economy, on the back of President Trump's plans to impose trade barriers. 

"I've always felt we get four rate cuts from the US Fed this year and now we're almost there in terms of market pricing. It's incredible to think just two months ago everyone was talking about a hike. With [US] politics now, just a day can change markets."

Fiscal hawks in US change dynamics, rotation out of US blue-chips 

In macro terms, the US government's ambitions to halve its fiscal deficit under Treasury Secretary and fiscal hawk, Scott Bessent, signal an ambition to promote private sector credit growth, according to Watling. 

"The private sector [and Bessent] want deregulation, lower rates to kick start a credit cycle, a capex cycle, and a household credit cycle," he said. 

The US executive's push to lower borrowing rates is also related to its treasury's needs to refinance significant amounts of short-term debt over the first half of 2025 and shift toward a more sustainable fiscal trajectory in terms of spending, Watling said. 

"This aligns with a broader shift towards reducing the government debt burden and promoting private sector credit growth. 

So, if you have a long term view of three to five years, bonds might not be the best place to park money, as yields could eventually trend higher in response to inflation and global debt dynamics."

Watling warns this prognosis also means the best days for the market-beating, blue-chip end of the US stock market are behind it. Moreover, he thinks crowded trades may face a sustained period of underperformance over the next five years, versus Europe.

"Now it needs to create growth and it does have demographic problems. It's been taking risk out of the economy since the Eurozone crisis [in 2012] and now it's got to do the opposite. 

They seem to have woken up to the fact they need to do things for themselves now. So they've triggered the escape clause for limits on defense spending and are talking about deregulating the banks. That's actually very good for growth", said Watling. 

Other areas for stock investors he tips over a five-year view are small caps in the US, emerging markets, and businesses linked to strong structural growth in demand for artificial intelligence services. 

On Australia, he says the country's high levels of household debt mean it's seeing a period of much slower growth, which is likely to feed through to modest corporate earnings growth and share market returns.