Ringing in the New Year with Cautious Optimism
BY JAMES H. DRYDEN | January 2025
Happy New Year!
2024 was quite a year. The S&P 500 gained 23.3%, achieving back-to-back 20%+ years for the first time since 1998 and only the third time since 1950. Communication Services (+38.89%) and Technology (+35.69%) led the way1, yet if we remove the “Magnificent 7” stocks and look merely at the equal-weight S&P 500, we were up only 11.1% for the year, illustrating what significance companies like Nvidia (+171.2%) played in last year’s overall returns2.
According to Wall Street analysts however, this isn’t how things were supposed to play out. A year ago, market strategists were negative on 2024 and the consensus view called for a recession and a paltry 1% gain in the S&P 500. Never before have analysts missed the mark by so much3.
Yet despite these failings, they’re back at it with their 2025 projections, and their views this year are markedly different. Thirteen of the 23 firms surveyed by Birinyi Associates are forecasting double-digit market gains in 2025, with the average projection calling for a 10.4% gain, slightly higher than historical norms.
From our perspective, we remain positive heading into 2025 but we don’t believe the sailing will be as smooth as it was in 2024.
Why We’re Optimistic
- Bull Market Momentum: Both the S&P 500 and Nasdaq remain in clear uptrends, similar to this time one year ago, Equally important, more S&P 500 members (201) are in uptrends than in downtrends (135)3.
- Economic Resilience: The stock market is a market of stocks, and critical to their success is the underlying economy, which remains strong. The U.S. consumer continues to spend, retail sales continue to grow, jobs continue to be created, and the unemployment rate continues hovering around a very respectable 4.2%3.
- Buybacks Continue: Companies continue to repurchase their own shares, which is a regular and ongoing flow of funds into the markets.
Why We’re Cautious
- Overheated Sentiment: From a sentiment perspective, there are simply too many bulls. We’ve never been big fans of sentiment surveys, but it is worth mentioning that 56% of respondents to the latest monthly consumer confidence survey believed that stocks will be higher one year from now, the highest reading on record. Extreme optimism can be a contrarian warning sign.
- Narrowing Market Breadth: Gains are once again becoming concentrated in a handful of large-cap momentum stocks, a pattern that can foreshadow volatility.
- Policy Uncertainty: The Federal Reserve appears to be slowing rate cuts, and fiscal policy under Trump 2.0 remains a wild card.
- Stretched Valuations: While valuations are nowhere near as stretched as they were during the Dot.com bubble, stocks most certainly are not cheap.
- Portfolio Rebalancing: Investors sitting on significant capital gains – especially in the Magnificent 7 – may have refrained from rebalancing their portfolios until the start of the new tax year, potentially triggering a pullback that could be magnified should quarterly earnings disappoint.
While our glass remains half-full, we likewise remain realistic and believe it would be prudent to anticipate a rough patch at some point. We trust our clients understand this is simply how it works, and that corrections – even in good markets – occur with some regularity. Last year was a great year, but we remember the 8% peak-to-trough decline in the early summer and the 27% decline in Nvidia during the same time. We should expect more of the same as we move forward into the new year.
As always, we’re here to guide you through whatever the year ahead may bring. For now, we’re wishing you and yours a healthy, happy, and prosperous New Year!
Onward.
1 FactSet Research
2 FactSet Research
3 Birinyi Associates
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request. The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock's weight in the Index proportionate to its market value.
PM – 07022026-7492476.1.1
Past performance is no guarantee of future results.