As 2024 draws to a close, investors are navigating a stock market that has shown significant gains throughout the year, particularly with the S&P 500 up over 23% as of mid-December. This considerable performance, however, has resulted in elevated stock valuations, which could pose challenges heading into 2025. The Federal Reserve has indicated that further cuts to interest rates will depend on significant progress in controlling inflation, thus establishing a cautious outlook for the year ahead.
Bankrate.com, in collaboration with its Fourth-Quarter Market Mavens survey, gathered insights from market professionals regarding investment strategies and anticipated trends for the upcoming year. Analysts project a more tempered return of approximately 7% for the S&P 500 in 2025, though various economic and policy uncertainties loom large on the horizon.
Mark Hamrick, senior economic analyst at Bankrate, emphasised the uncertainties facing investors, stating, “There’s a world of uncertainty facing investors, including the variables of fiscal and monetary policy here at home.” He refers to potential influences from the new GOP-led Congress and the policies expected from President-elect Donald Trump.
The anticipated actions from the Federal Reserve are expected to have a profound impact on equity markets. Currently, 70% of those surveyed perceive Fed policy as favourable for stocks in 2025. Notably, only 10% view the policy as a hindrance, while 20% consider it neutral. Dec Mullarkey, managing director at SLC Management, highlighted that "Rate cuts tend to be supportive of equity performance, but the core driver is the growth outlook." With inflation rates declining and earnings estimates improving, this could presage a favourable environment for the stock market.
Conversely, some analysts, like Chris Fasciano, senior portfolio manager at Commonwealth Financial Network, caution that while interest rates may fall, they may not decrease as significantly as the market anticipates. Concerns have also been raised regarding how the bond market will respond to the federal deficit, which could adversely affect long-term interest rates and in turn stock valuations. Patrick J. O'Hare, chief market analyst at Briefing.com, noted, “The Fed doesn’t control long rates, which impact equity valuations. A spike in long-term rates wouldn’t bode well for equities.”
Political changes, particularly the GOP securing control of Congress and Trump’s reelection, have been greeted positively by markets owing to expectations of tax cuts and regulatory relief. However, the complexities of the GOP agenda could introduce risks. Mullarkey remarked, “The challenge with evaluating the GOP economic agenda is that it contains the prospects of stimulus from tax cuts and lighter regulation but also comes with offsets from the threat of tariffs and deportations.”
Amidst these dynamics, analysts are identifying potential investment themes that may have been previously overlooked. The survey highlighted opportunities in sectors such as large-cap high-dividend companies, particularly in real estate, financials, utilities, and consumer staples, which may offer stability amidst market volatility.
Additionally, excitement surrounding artificial intelligence remains prevalent. O'Hare pointed out that while current returns have largely accrued to dominant players in the AI market, opportunities may emerge among smaller firms in 2025 as investors expand their horizons. However, there is scepticism regarding whether AI technology can produce returns in the desired timeframe. Kim Forrest, chief investment officer at Bokeh Capital Partners, suggested that investors may be overly optimistic: “I think Wall Street is assuming that productive uses of generative AI are right around the corner and I think the timeline is too short.”
Overall, investors are advised to conduct thorough research and remain cognizant of the evolving landscape as the interplay of economic indicators and political developments will shape the investment climate for the upcoming year.
Source: Noah Wire Services