It’s been a strong year for stocks, and the best may be yet to come.
With just one trading day left in 2024, the S&P 500 is up about 23%. However, when investors look back on the past year, they will see a textbook example of why the stock market is a poor indicator of the economy, which has provided unclear and in some cases contradictory data.
For example, many indicators indicate that the US economy is doing well. Consumer spending is stable, unemployment is falling, inflation has eased from 2022 highs, and the Federal Reserve has begun cutting interest rates.
On the other hand, oil and gasoline prices behave as if there is little demand for them. Gold and Bitcoin are rising as if a major economic crisis is approaching. And the average wage for American workers, $43,222.81, is only about $12,000 above the poverty level for a family of four.
Despite this, with a few exceptions, putting money into the market has given investors the chance to maximize returns, with analysts predicting an even better year in 2025.
Why 2024 was a great year for stocks
The simplest explanation for the market’s strong performance in 2024 is rising earnings. As early as 2022, companies began cutting payroll and taking other cost-cutting measures to impact profits. These steps accelerated in 2024.
However, to the disappointment of many buy-and-hold investors, the biggest gains were limited to a handful of stocks in a few sectors. Artificial intelligence (AI) stocks performed well. Much of the attention has been on companies providing critical hardware for artificial intelligence infrastructure, such as NVIDIA Corp. (NASDAQ: NVDA). But as the year comes to a close, investors are looking at stocks like Palantir Technologies Inc. (NYSE: PLTR) and SoundHound AI Inc. (NASDAQ: SOUN) as the future of artificial intelligence.
But AI stocks weren’t the only ones to show gains. The GLP-1 craze has driven shares of biopharmaceutical companies such as Novo Nordisk A/S (NYSE: NVO) and Eli Lilly & Co. higher. (NYSE: LLY). And companies in other sectors outperformed the S&P 500, including blue chips like Walmart Inc. (NYSE: WMT), JPMorgan Chase & Co. (NYSE: JPM) and American Express Co. (NYSE:AXP).
In every sector, earnings separate the winners from the losers. Companies that showed they could deliver strong earnings and/or raise their forecasts were rewarded—perhaps even beyond measure. Conversely, companies that missed profits and/or lowered their forecasts were punished—perhaps even excessively.
Why 2025 Could Be an Even Better Year for Stock Investors
The main reason to believe that 2025 could be a great year for stocks is simply based on probability. Since 1926, the S&P 500 has delivered positive returns 73% of the time. Over the same period, the index delivered double-digit returns 60% of the time.
The mathematics is supported by macroeconomic conditions. The last time the S&P 500 posted negative returns was in 2022. At the time, inflation was at a 40-year high and the Federal Reserve was beginning a campaign to raise interest rates. Looking ahead to 2025, inflation will be steady but significantly lower than in 2022, and interest rates are moving in a lower and more bullish direction.
And then there’s this thing known as “animal spirits”—emotional and psychological factors that influence consumer and investor behavior, often leading to changes in economic activity. There has been a noticeable shift in investor sentiment since the US presidential election, and there are many reasons why investors should believe the enthusiasm will continue into 2025.
To begin with, one of the first things the new administration will do is make the 2017 tax cuts (i.e., the Trump tax cuts) permanent. The president-elect also promised to cut the corporate tax rate from the current level of 21% (already the lowest since 1939) to 15% for companies manufacturing their products in the United States.
But investors have something to think about. In addition to tax cuts, the new Trump administration wants to tighten regulations on energy production, financial services, health care and the environment. Investors are already seeing evidence that it could boost mergers and acquisitions (M&A) activity, which has slowed to the point of greater antitrust scrutiny.
Then there’s the Department of Government Effectiveness (DOGE), a proposed initiative aimed at identifying and eliminating wasteful government spending, streamlining bureaucratic processes, and making federal programs more cost-effective. This is, of course, a dubious sign, but even if the initiative achieves only part of its goal, it will benefit the economy as a whole. That’s because cutting government spending could play a significant role in the Federal Reserve’s efforts to bring inflation down to its preferred 2% target.
On the demand side, the Federal Reserve said it would not cut interest rates as much as originally forecast. However, the trend is still set to continue with at least a few rate cuts throughout the year, which should keep consumer spending afloat.
Where to invest in 2025
Of course, believing that the market will go up is one thing; making decisions about where to invest that money is another. Here are some industries to pay attention to:
Technology
It will come as no surprise that technology trading will continue to be active in the new year. Artificial intelligence will remain a hot topic, as will semiconductors. Investors may want to pay attention to software stocks, as the companies’ ability to monetize AI will be a key driver of profitability.
Industry
Despite efforts to cut government spending, most of the money from the Infrastructure Act is contracted through 2026. This means that companies in this sector will continue to represent sound investments.
Energy
The Trump administration has made US energy independence a priority, and that bodes well for oil and gas stocks.
Utilities
Demand for data centers and the creation of artificial intelligence infrastructure are just two reasons to believe that electric and gas stocks will be among the winners.
Investors should expect volatility
Markets do not move in one direction all the time. With many stocks commanding high valuations, a pullback in the first quarter of 2025 is not only likely, but will be welcomed by many investors looking to pick up some of their favorite stocks at more attractive prices.
Beyond cost concerns, there are other unknowns in 2025. To begin with, the breadth and impact of Trump’s tariff policies are unclear. And while the downsides are likely exaggerated, it’s safe to say that the battle to control inflation is not over yet.
The New Year will also bring geopolitical uncertainty. How the Trump administration handles the Russia-Ukraine war and how well it calms tensions in the Middle East and China will be critical to calming markets.
Despite all of the above, volatility is normal. Investors should consider the advice that time on the market better than trying to time the market. The trend is that stocks are rising. Don’t fight the trend.
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