Year-End Review and 2025 Market Outlook
At midnight on Tuesday, December 31st, the almost 12,000-pound crystal ball will descend in New York City’s Times Square to mark the end of 2024 and the arrival of the new year. 2024 was a remarkable year for the U.S. stock market. Despite, or perhaps because of, continuing wars in Ukraine and the Middle East, as well as serious economic troubles in many developed economies, investors felt more confident allocating their funds in U.S. equities. At least in the U.S., there was a lot of excitement about the potential economic benefits of AI (artificial intelligence), interest rate cuts, decisive election results, and optimism surrounding the potential business-friendly policies a second Trump administration could implement to aid corporate profits.
While the S&P 500 stock index will close the year with a gain of around 24% (as of December 30), this does not mean that all stocks in the index shared equally in the gains. As a matter of fact, according to FactSet, the top 20 industry leaders gathered most of the gains and are valued collectively at around $24 trillion, while the remaining 483 companies in the index (503 total) are valued collectively at $29 trillion. In other words, investors trusted the U.S. stock market more than foreign markets, but only selectively the top 20 industry leaders. Furthermore, it wasn’t fresh capital that poured into these 20 top performers. There was $6.2 trillion on the “sidelines” (Money Market and Certificates of Deposit) at the beginning of the year, compared to $7 trillion at the end of the year. So, it wasn’t money from the “sidelines” that was moved from safer to riskier investments. Instead, it was capital that was taken from the 483 companies and re-allocated to the top 20 performers. This worrisome lack of breadth in the U.S. stock market is not a sign of a healthy market. For example, in a healthy market, investors trust most companies and are willing to allocate their capital to them. That’s the best way to attract new capital and advance the overall market to new highs.
Another worrisome sign for the U.S. stock market is valuation. We have written about valuation concerns in previous newsletters as they certainly affect future market returns. The desirable “buy low — sell high” practice is not currently available for fresh capital to be put to work when stock prices are too high compared to the earnings these companies produce. The forward Price-to-Earnings (PE) ratio for the S&P 500 currently stands at 24.5x, meaning investors today are paying about $24.5 for every future $1 produced by the companies in the index. This is historically a steep price to pay even for the usually pricey U.S. stock market. For the forward PE ratio to come closer to a historical 16x or even a rich 20x, either future earnings have to come much higher than current earnings (denominator increases) or the prices have to come down (numerator decreases). While it is possible that lower interest rates from the Federal Reserve could reduce borrowing costs and boost earnings, or the 2017 Trump tax cuts could be extended and lead to higher net corporate earnings, it is worth noting that the current US stock market environment is more likely one of “buy high — hope to sell higher.” It works, as long as the U.S. economy fires on all cylinders.
While the U.S. economy is performing better than the rest of the world, mainly due to our post-Covid stimulus being much larger than any other economy (adjusted for the size of the economy), we do exist in an interconnected world economy. If other large economies sneeze, the U.S. economy may catch a cold too. If you follow world news, you may have noticed that the UK government collapsed, and the ruling coalitions in Germany, France, and Japan collapsed as well. All were the result of tough economic conditions and their inability to agree on a budget. Brazil is an economic basket case and has joined China and India in trying to revive their economies and support their currencies against the U.S. dollar. The Canadian dollar (“Loonie”) is losing value fast, while the Trudeau government is coming apart at the seams. What this means for the U.S. economy is that as big U.S. and foreign businesses experience slowing demand for their products and services in the global market, they will have to reduce production and cut costs. Since U.S. wages are very high compared to the rest of the world, it seems reasonable for businesses seeking to cut costs fast to reduce their U.S.—based workforce. That will make the most difference faster. In this context, you can understand the December 18th comment from Federal Reserve Chair Powell about his concern about the weakening picture of U.S. employment, despite the currently low unemployment rate.
In case you believe the U.S. economy is insulated from what is happening in the rest of the world, here is a list of businesses with the most store closings in 2024: Family Dollar (718), CVS (586), Big Lots (580), Conn’s (553), Rue21 (543), 7-Eleven (492), Rite Aid (408), 99 Cents Only (371), American Freight (353), Walgreens (259). Party City just announced it was closing all 850 stores and going out of business, but these store closings will take place in the next few months. There are currently hundreds of thousands of U.S.--based workers in the process of losing their jobs as their places of employment shut down. Naturally, fewer store locations require fewer deliveries; therefore, the trucking industry has been hit hard. Here is a brief list of recent bankruptcy filings from trucking and logistics operators: Cedar Trucking, WV (filed 12/10/24), KAL Freight, CA (12/5/24), Star Transportation, FL (11/1/24), Mighty Move Transportation, IL (10/24/24), Sunset Logistics, TX (10/3/24), Big RIG Trailers, Tires Partz, CAN (6/24/24).
Against this macroeconomic background, here at FFG we remain conservative in our approach to allocating capital. We prefer domestic and foreign value opportunities over the hype. We certainly don’t follow the herd and refuse to pay 50x earnings for some “top performers,” as their future earnings may be disappointing. We continue to like Treasuries despite fears about “higher for longer” interest rates, as such fears would be justified in a booming world economic environment, which we don’t think will be the case. With all that in mind, here are some of our more specific projections for 2025:
Oil stocks may not be the great performers investors expect from a second Trump administration. “Drill, baby, drill” increases oil and gas supply, reducing prices and oil company earnings. During the first Trump administration, the lower oil prices were good for consumers but led many oil companies to bankruptcy.
Chinese and emerging market stocks may do better than investors expect. Despite the tough Trump rhetoric about tariffs, we expect the second Trump administration to follow in the footsteps of the first Trump administration, signing new trade deals with our major trading partners, eliminating further fears of trade wars.
The FED will continue the rate-cutting campaign as inflationary fears subside. The slowing world economy is anti-inflationary by nature. Tariffs may cause a price increase, but empirical research shows it is a one-off and not the continuous price increase that we identify as inflation.
The U.S. dollar may depreciate following lower U.S. interest rates. This will favor U.S. exporters and foreign businesses generating revenues abroad. Foreign currency revenues translated to U.S. dollars will look even better.
Treasury bond prices may find a bid as U.S. interest rates decline. Despite fears in 2016 that a “big spender” Trump administration would cause rates to increase and Treasury prices to decline, the exact opposite happened in the months after the Trump inauguration of January 17th, 2017, as fears subsided.
Merger and Acquisition activity may increase, aided by lower interest rates and a more lax regulatory environment. This could give a boost to small and medium businesses, which depend more on accessing cheaper capital to grow.
Tax cut legislation may be enacted later in 2025 rather than earlier. During the first Trump administration, the tax cuts were enacted at the end of 2017, as a lot of these provisions had to be introduced and negotiated. This time around, the negotiations will be about how long to extend the current provisions and the introduction of any new ones. However, there is another wrinkle to consider this time: the Debt Ceiling extension. Predictably, the outgoing administration has exhausted the federal government’s authorized borrowing capacity, and come mid-January, the Treasury will have to borrow from the federal employees’ pension funds to cover its payments. In government parlance, this is referred to as “Treasury Extraordinary Measures.” The point is, it may be harder than investors expect to pass the new tax cuts when there is a debt ceiling negotiation going on.
Pharma stocks may do fine despite fears of the appointment of Robert Kennedy as Secretary of the Department of Health and Human Services. During the first Trump administration, pharma stocks took a dive initially as investors feared Trump would undo the Affordable Care Act, and some people would lose health insurance and wouldn’t buy pharmaceuticals. None of these happened, and pharma stocks performed well. We expect the new administration may improve the new drug approval process, which may introduce new blockbuster drugs to the market faster.
Overall, we are constructively optimistic about 2025. This means we are optimistic but at the same time realistic about our expectations given the current macro environment. The U.S. stock market may have a good year if certain conditions are met. First, internationally, we need to avoid a global recession that could drag the U.S. economy lower too. Second, domestically, we need to avoid getting bogged down with the debt ceiling negotiations for a long time, which delays passing tax cuts that investors have already priced into the current stock prices. Third, we welcome a market correction that takes some of the froth from current stock prices. Investors dislike corrections because they temporarily reduce portfolio values. Corrections, however, are necessary as they allow us to put capital to work at better prices, which is the key to good long-term portfolio performance. We are overdue for a correction, and the sooner it comes, the sooner we can look forward to taking advantage of better investment opportunities.
As always, we are here to answer your questions and assist you in your wealth-building journey.
Have a healthy and prosperous 2025!
Stay Fierce!
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The information contained herein reflects the opinions, estimates, and projections of Fierce Financial Group LLC (“FFG”) as of the date of publication, which are subject to change without notice at any time subsequent to the date of issue. FFG does not represent that any opinion, estimate, or projection will ever be realized. All information provided is for informational purposes only and should not be deemed as investment advice or as a recommendation to purchase or sell any security. FFG and its clients may have an economic interest in the price movement of specific securities discussed within this document, however, FFG and its clients’ interest is subject to change without notice. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy or completeness of any data or facts presented.
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