There are three reasons to be optimistic about 2025. The bottom line is that economic data remains stable, if a little mixed; consumers remain resilient and there is widespread demand worldwide. What this means for investors is that sector rotation is still a factor influencing market activity today, so volatility may remain high. However, the stock rally will continue to diversify away from technology companies into a broader range of stocks and support the stock market’s upward trend. S&P 500 Index NYSEARCA: SPY next year.
1) The economy is resilient and supported by healthy labor markets.
The US economy started the year slowly, expanding just 1.3% in the first quarter, but growth accelerated sharply in the second quarter to 3% and maintained a strong pace of 2.0% in the third quarter, and the forecast for the fourth quarter is the same. According to the GDPNow Tool, GDP in the fourth quarter is expected to be around 2.5% and could exceed this forecast due to an upward trend in estimates: goods and services, consumer spending and business investment are driving growth. The latest consumer data shows spending remains stable and improving, with retail sales up 2.8% year-on-year in October and outpacing inflation.
Labor markets support economic strength. The labor market has cooled significantly from its peaks but remains stable compared to historical norms. The latest data shows that job creation, vacancies, initial unemployment claims and total unemployment claims are all in line with late 2019 and early 2020 data, which was good. At the time, the US economy was accelerating, pushing the S&P 500 to new all-time highs. The worst news is the leading indicator index, which has been in negative territory for more than two years. The index reading is a worrying sign, but it is tempered by cooling labor data and other post-COVID normalizations skewing the readings.
2) Consumer power is widespread across all categories except big-ticket items.
Retailers’ third-quarter earnings reports were generally strong. Not all were good, and some were down from last year, but growth and outperformance are trends. Reports from Walmart New York Stock Exchange: WMT, TJX Companies New York Stock Exchange: TJXAnd Williams-Sonoma New York Stock Exchange: WSM align with this assessment, providing a broad view of consumer trends. Each exceeded results and noted strengths in all categories.
The outlook for the fourth quarter is also strong and suggests these trends will continue. The NRF forecasts growth of 2.5% to 3.5% for the holiday season, down from last year and due to a shortened season, but it is very cautious given trends. Walmart, for example, forecasts its fourth-quarter performance will be at least 100 basis points better and likely to beat its forecasts.
Delta Airlines New York Stock Exchange: DAL serves as a leader in the global economy as its activities serve the needs of businesses and consumers at home and abroad. Trends in 2024 will be positive, with international demand driving positive, sustainable system-wide growth and a positive outlook. Guidance for the fourth quarter of 2024 and into 2025 assumes continued growth with capacity additions of 3% to 4%, leading to mid-single-digit revenue growth next year. Fuel costs, another indicator of the global economy and the S&P 500, are expected to grow more slowly than revenue, providing higher business margins. Wider margins and improved profitability are positive catalysts for the stock.
3) The S&P 500 is at a critical juncture
The S&P 500 is moving higher and is at a critical juncture. The move to new highs in January pointed to a price target of 6100, where the market is today. This level could provide a market top, but if it does, it may not last long. Bullish indicators include candlestick action, MACD and stochastics, which suggest a new high will be made soon. A move to a new high would put the S&P in uncharted territory with nowhere to go but up. In this scenario, it could maintain growth until the end of 2025 and gain another 1,300 points along the way.
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