A Tale of Two Views
On one level, optimists like Goldman Sachs are bullish. Optimists believe that the S&P 500 can rise to 6,500 in 2025, powered by healthy economic expansion and continued earnings for companies. In its outlook for November 2024, earnings will go up 11% in 2025 and 7% in 2026, according to them. That outlook, however, comes with qualifiers. The renewed escalation of a tariff war initiated under then-President Donald Trump added a dash of uncertainty to the mix.
On the other hand, alarm bells have started to toll louder. Nassim Taleb, in his book *The Black Swan*, warned investors about the dangers of over-concentrating bets in technology stocks, particularly in Nvidia. It likens it to the marketplace shock caused about by breakthroughs in AI technology, such as in DeepSeek. Taleb’s message is a reminder that even the most exciting sectors can fall victim to a sharp and extreme dislocation.
The Role of Diversification
Morgan Stanley shares the same sentiments, advising investors in 2025 to diversify portfolios. The firm cites possible fallout from a new US presidency and shifting marketplace dynamics. With much of the recent market growth coming from so-called "Magnificent 7" tech giants—Apple, Microsoft, Amazon, Alphabet, Meta, Tesla, and Nvidia—their profit margins will decelerate, Morgan Stanley says. At the same time, the other 493 S&P 500 companies will struggle to expand earnings without laying off workers, adding another layer of complexity for investors to sort through.
JPMorgan, for its part, is forecasting a 2025 S&P 500 price target of 6,500, a 9% gain over current levels. That is a tad below its 10% annual average over past years, but at least a sign of mild expansion. Goldman Sachs, meanwhile, is even more positive, forecasting a 10% annual return.
A Glance Back at 2024
To understand in what direction the market will go, it’s worth taking a trip down memory lane and looking at 2024’s standout performance first. In a downturn in the fourth quarter, the S&P 500 increased 25%, its two-year performance best since 1998. The S&P 500’s best 50 stocks increased even more, 34%, fueled by healthy performance at companies, a strong economy, and overall confidence in artificial intelligence.
But not all in the market shared in the glory. Mid- and small-capitalization stocks rose, but at a distance, lagging far behind the bigger stocks. The S&P MidCap 400 rose 14%, and the S&P 600 small caps rose only 9%, held back by inflation fears and less-than-anticipated Federal Reserve interest-rate reductions.
Sector performance was a highlight. Communication Services, Information Technology, and Financials led the way, with each returning more than 30%. Growth stocks, and particularly technology stocks, did well, with the S&P 500 Momentum Index gaining 46%. S&P 500 Quality Index had a good performance, ranking third in the major indices.
In spite of some August and December volatility, overall market uncertainty, measured using VIX, remained below 18 year-end. In the credit market, high-yield bonds outperformed investment-grade bonds by 6%, and a rise in 10-year Treasury yields generated losses in a majority of bond indexes during the fourth quarter.
What Lies Ahead?
As 2025 continues, investors will have to navigate a universe with opportunity and danger. BlackRock, for its part, cautions that the overall market will not deliver a third consecutive double-digit, outsize gain. History shows that a 20%+-sized return three years in a row occurs only 3% of the time in observations dating back to 1928. In the 1990s, such runs did occur, but at much lower starting valuations and margins. BlackRock forecasts returns to normalize to near its annual mean of a little less than 11%.
Policy changes regarding trade and immigration can have a significant impact on the direction of the market, too. Historically, the first year of a presidency will produce positive returns, but inflation impact of new tariffs and immigration policies is not yet certain. Much will depend on whether and in what manner the Federal Reserve will adjust its monetary policy in response.
Final Thoughts
The US stock market in 2025 will have a narrative of contrasts. On one, sound fundamentals and steady earnings growth make a case for optimism. On another, political uncertainty, policy shifts, and the threat of a market shock remind one that one must exercise caution. For investors, adaptability will be paramount. Diversification, careful analysis, and a willingness to make changes in response to changing events will be key. As ever, the marketplace will reward those who have prepared not only for future opportunity, but for future challenge, as well.
Disclaimer: The information provided in this blog is for educational and informational purposes only. It does not constitute legal, financial, or professional advice.
