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What Is In Store For The 2025 Stock Market?
As we end 2024 with another good year and start talking expectations for 2025, it is important to remind people of the article I wrote in January of 2024. In that article I wrote, “the experts rarely get it right. This is not because of some deficiency in intelligence or information. It is because the markets are not predictable.” To reinforce that point, I stated the top 8 banks predictions for the S&P 500 for 2024. The high was a little less than a 10% return with the worst being a 20% decline. Not one of them came close to the 20%+ return we witnessed.
Looking Back at 2024 and Looking Forward in 2025
Our call for the 2024 year was “cautiously positive,” as noted in my January “2024 Market Expectations.” We also undersold the potential for the year. The good news for 2024 was the A.I. market explosion. The bad news is the market breadth, or depth of the rally, still was not good enough. The market is still top-heavy.
This is one of the reasons we go into 2025 with the same mindset, cautiously positive, albeit a bit more cautious. There are multiple reasons for being cautious going into 2025, with the first being valuations.
- The market is on the high end of valuations, bordering on being over-valued, which historically has limited future returns. There isn’t a single metric that can be used to determine if a market is fairly valued. This article would be entirely too long if I broke it down at the level it needs. I will just use the most common indicator, price over earnings (P/E) ratio, which sets at approximately 27 to start the year, as a high-level guide. Historically, the median P/E ratio for the S&P 500 is approximately 18. However, if you exclude the very volatile abnormal years, we really range from 20-28. Not high enough to set off alarms but on the upper end.
- Another reason for being cautious is inflation/interest rates. Inflation has been much more resilient than expected by the Federal Reserve and the markets. Expected rate cuts keep being either pushed out or just eliminated. Higher for longer interest rates is not good for the market. Pay attention if the talks of raising rates again gain momentum.
Since I prefer to end with the positives, there are also very solid reasons to be positive about the markets in 2025, which I outline below:
- With Trump winning the election, we should expect less regulations going forward, which is good for the markets. I believe we will see the benefit of that more in the second half of 2025.
- Even though the market is at the high end of its historic valuation trend, there are some real pockets of opportunities, assuming the economy continues to grow. One of them is small cap stocks. Since historically small cap stocks grow at a faster pace than large caps, they have a valuation premium over large cap stocks. That premium has disappeared. I like small cap stocks over the next 3-5 years.
- Also, regarding valuations, The S&P 500 is a weighted index and is highly impacted by 7 stocks, Apple, Microsoft, Tesla, NVDA, Google, Amazon, and Facebook. Those stocks also highly impact valuations metrics. Just because the overall market is at the high end of valuations, does not mean every industry is over-valued.
- The artificial intelligence growth is still in the early stages. Even though that growth might be built into some high-tech stocks, we haven’t seen that transition to the end user. A.I. only helps the markets if it helps companies either be more productive or save costs. I doubt we see that in the next couple years, but the expectation could help the markets.
I expect some downside volatility in the first half of the year but for the market to be stronger in the second half. I do not believe we will see any major correction, unless caused by a black swan event. I expect a single digit return for 2025.
If you are wondering, the top 8 banks have predicted 2025 to be up from a range of 20%, which are Oppenheimer’s and Wells Fargo’s call, to approximately 10% from the remaining 6 top firms. Unlike last year, there is not much variation in the predictions, with none of them being negative. I do not know if that is good or bad news.
Whatever you think of 2025, we know trying to time the market does not work long-term. Prudent investment strategy includes staying invested since no one really knows where the market is headed. One can get more conservative by over-weighting in low volatile and dividend paying stocks. At least give yourself a chance if you’re wrong and, at the same time, trying to protect some the downside.
Finally, fixed income might finally be worth adding more to a portfolio, as long as the fed doesn’t start discussing raising rates. More likely rates stay relatively flat, which means you can expect higher interest payments from the bonds without the principal reduction due to higher rates. If rates do drop more than expected, you should expect some principal gains.
