First, we would like to wish you and your family a happy and healthy New Year! We hope you had a great holiday season and enjoyable New Years.
As we close out the second week of 2025, let’s pause for a moment to reflect and appreciate (or cheers) to the market returns we experienced in 2024, with the Dow, S&P 500 and NASDAQ indices posting full year total returns of 13.0%, 23.0% and 29.0%. Keep in mind, this follows the 20+% market returns we experienced in 2023 as well.
As I mentioned in my November (2024) note, back-to-back 20+% Index returns a rare, making 2023 and 2024 only the fourth time this has happened in the last 75 years. Taking a stroll down memory lane, coming into 2024, there were plenty of potential headwinds to be concerned about.
A short list of those concerns included high equity valuations, narrow leadership by the largest technology stocks, rising long-term interest rates, election uncertainty, deficit spending and various geopolitical issues. However, stocks rallied through all of that without so much as one 10% correction -a testament to staying invested and not succumbing to the various headline risks being pushed by the financial news media throughout the year.
Turning our attention to 2025, again, there is no shortage of concerns, and this year could prove to be a challenging one -but make no mistake, we are still bullish. We do, however, want to set realistic expectations for equity returns to be modest with our forecast of 8.0 -10% year-end total return, which we’ll take after the last two years’ returns. Our view is supported by a stable economy, solid corporate profits, a Fed that is no longer hawkish, as well as some potential deregulation tailwinds.
Currently, stocks are pricing in a lot of good news and positive surprises may be tougher to come by, so a repeat of the strong market performance in 2024 is unlikely. With the bull market another year older, interest-rate risk rising, valuations already being elevated, and still significant geopolitical threats, we expect volatility to be more prevalent in 2025.
If we assume a forward P/E multiple of 23 times 2026 EPS of $275, this gets us to a fair value target range of 6,275–6,375 for the S&P 500 by the end of 2025. Further upside could come from lower interest rates, improved productivity gains from Ai, inflation moving in the right direction again and prospects for further tax cuts.
Over the last three months, the 2025 narrative of a lower interest rate environment has started to unravel due to stronger than expected job growth and it’s becoming more apparent that sticky inflation is an issue – particularly in the housing sector. This was reinforced by the December Nonfarm payroll report released this morning, which showed 256,000 new jobs created where economists expected only 160,000.
Taking a step back and looking at the big picture, a strong economy is good news, but it also means that the economy is running hotter than the Fed expected which is problematic in squashing the last bit of inflation in the system. With a stronger than expected economy, sticky inflation, it’s looking more and more likely that the majority of the interest rate cuts scheduled for 2025 are off the table for now. The market is having a tough time digesting this new view of higher for longer interest rates. Which also means little relief within the housing sector.
Tactically, from a portfolio management perspective this environment can be a double-edged sword. Meaning, bond yields will continue to drift up which will allow us to roll maturing bonds into new bonds locking in higher yields (good). From an equity perspective, stocks or sectors that are traditionally interest rate sensitive – which are Utilities, REITS, Financials and certain areas of Technology tend to struggle in this environment.
In the short run, this means that some of our tech holdings might decline temporarily but this also opens up the opportunity to add to these positions at attractive prices. For the Magnificent 7 (Apple, Amazon, Google, Meta, Microsoft, Nvidia and Tesla), their business isn’t affected by a 75-basis point upward move on the 10-year Treasury, but their stocks might get dinged on any interest rate induced selloff (opportunity).
Last month (December), we made the decision to not automatically reinvest the individual bonds maturing within portfolios for this very reason. We wanted to roll into 2025 with excess cash within allocations for added flexibility and to have plenty of dry powder at our disposal -which we will be utilizing in the coming months.
Cheers to a new year and we look forward to what 2025 has in store.
As always, we wish you and your family a great Friday evening, and a wonderful weekend!
Please reach out to us with any questions or comments you may have regarding your specific situation.
Jaran C. Day, Chief Investment Officer
Griffin Dalrymple, CFP®, Chief Strategy Officer
Past performance is not indicative of future performance.
The views expressed represent the opinion of Opinicus and are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Opinicus’s view as of the time of these statements. Market performance cited is not indicative of portfolio performance experienced by portfolios Opinicus manages. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties.