4th Quarter News
We definitely enjoyed seeing two consecutive bumper years in the stock market. The S&P 500 ended 2024 with a gain of 24% nearly equivalent to its performance in 2023. The looming question now is: Will this double-digit rally continue through 2025? That kind of three-in-a-row streak last occurred in the dotcom era of the late 1990s.
Of course, as is their inclination, the big institutional forecasters on Wall Street are pretty “gung-ho” – to best describe their view. A recent survey by MarketWatch of the major firms put the median target for the S&P 500 at 12.2% growth for 2025. This forecast is fueled by a strong economy, healthy earnings growth, likely government deregulation, and the widespread adoption of artificial intelligence. The price action may be choppy – but the ingredients for more stock gains are in place.
At Hudson Advisors, we are always optimistic. But we are never complacent. At the current time, we observe levitating bond yields, which reflect fears of resurgent inflation, and high equity prices, which leave the market priced for perfection. We worry about the inexorable growth of government debt and the policy uncertainty that attends change in Washington DC. We wait to see the timing and scope of specific changes to trade, immigration, fiscal, and regulatory policies. We believe the fluctuating market action in the early days of this year supports our concern.
In brief, we are positive on the market in 2025 – but we are not wildly bullish. We will advise our clients to be cautious at the same time we look for pockets of long-term opportunity.
The Economy: A strong economy underlies the upbeat forecasts for the stock market. The consensus economic forecast is for GDP to expand by 2.1% in 2025 – down from 2.7% in 2024 – but still solid. Consumers have good purchasing power as inflation has abated and wage growth is healthy. Business investment should be assisted by Trump’s plan to extend the 2017 tax cuts and ease regulations. Most significant, the labor market is proving quite buoyant and the December jobs report surprised with a boost of 256,000 jobs and the unemployment rate ticked down to 4.1%.
All that said, we have some major uncertainties. Inflation has subsided but remains stubborn in the 2.4% to 2.6% range. The Federal Reserve has already indicated that it most likely will cut interest rates twice in 2025 – as opposed to four times as anticipated earlier. The strong job numbers create some concern that inflation might rebound – causing the Fed to pause on rate cuts – or even raise them again. The reaction on Wall Street would be highly negative. The economy also faces the unpredictable consequences of Trump’s trade and tariff policies.
