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5 keys to the markets in 2025; also expect some drama

Pabio December 23, 2024

In case you haven’t been counting, there are five trading days left in 2024. And 2024 has been a very good year so far. It’s not a record, but a gain of 24.3% for the Standard & Poor’s 500 index, as of December 20, is not a snub.

If it’s a record you’re looking for, go back to 1995, when the index jumped 34.1% and began a 5-year streak where the index rose 20% per year. (Okay, 1999 was only a 19.5% gain.)

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Additionally, last week reminded investors and everyone else that markets can be volatile.

There was unease ahead of Wednesday’s Federal Reserve meeting. Inflation was increasingly stuck at about half a percentage point of the Fed’s 2% target. Fed Chairman Jerome Powell warned Wednesday that rates may not fall as quickly next year as many had expected.

The S&P 500 and the Dow Jones Industrial Average both fell nearly 3% following Powell’s statement. The Nasdaq Composite Index fell 3.6%.

It was such a surprise that Fed officials spent Friday reassuring everyone that rate cuts would continue.

Christmas is Wednesday and, unusually on the calendar, Hanukkah begins on the same day. The markets will be closed for the day.

Monday will be a full day of trading. On Tuesday, trading stops at 1 p.m. Full trading days are set for Thursday and Friday.

New Year’s Day is also a public holiday, but there will be full trading days on other days of the week starting December 30.

If Wall Street research departments and market gurus are to be believed, 2025 should be a decent year. There appears to be consensus that the S&P 500 will hit 6,600, a gain of 11.3% (before dividends). There are some solid projections that the index will finish at 7,000 or higher, a 14% gain.

These are of course large cap stocks and so on. And indices, including the S&P 500, Nasdaq and Nasdaq-100 indices and ETFs such as the SPDR S&P 500 ETF Trust SPY and the Invesco QQQ trust (QQQ) are strongly dominated by technology and associated values.

But this positive sentiment would also extend to mid- and small-cap stocks, according to conventional wisdom.

There are three main catalysts:

Most professional investors believe that AI spending will continue at current massive levels and that monetization (profits) will come. Good for Nvidia (NVDA) Taiwan Semiconductor (TSM) Microsoft MSFT, Amazon (AMZN) Broadcom (AVGO) Google parent alphabet (GOOGLE) and Facebook parent meta-platforms (META) .
Deregulation will spur more mergers and acquisitions and, if the bond market cooperates with decent interest rates, it will produce a new wave of IPOs.
Finally, as Seattle investor Jon Markman said Friday, the new Trump administration is expected to “provide investors with the fuel needed to maintain strong stock market gains.” Investment strategists see incredible power in deregulation and tax cuts.”

All this assumes that the raucous and tension-filled budget battle that has just ended does not resume.

The markets did not find the budgetary struggle reassuring. This could be seen in the unease over rising bond yields, which led to higher mortgage rates.

As of Friday, only three sectors of the S&P 500 were up in December: consumer discretionary, technology and communication services, and they are among the four dominant sectors in 2024 and expected to dominate in 2025. The fourth is financials.

The technology is simple.

Consumer discretionary stocks include Tesla, Yum! Brands (YUM) Home deposit (HD) Lennar home builders (LEN) and DR Horton (DHI) and Césars Entertainment (CZR) . As the sector is very fast-paced, stock market performance can vary considerably. Royal Caribbean is up 84% this year. Tesla is up 69%. Nike (NKE) and Lululemon Athletica (LULU) are down 29% and 26% respectively.

Communication services include Alphabet, Netflix (NFLX) Walt Disney (SAY) and Meta. The sector leader is Netflix, up 87%, followed by Fox Corp. Class B (FOX) and Fox Corp. Class A (FOX) up 69% and 67%, respectively.

Some consumer staples, like Walmart WMT and Costco Wholesale COST, are already winners this year, up 75.5% and 44.5%, respectively. But the sector as a whole is only up 13.6%. They should do well, and those with strong management and growing dividends will attract investors.

Energy is one of the worst performing sectors in the S&P 500. Consumers are happy with it.

The fortunes of these companies, including Chevron (CLC) and Exxon Mobil (XOM) is directly linked to the price of oil and, therefore, vulnerable to geopolitical forces

The Organization of the Petroleum Exporting Countries, however, is struggling to get its members to respect its quotas. And they face a huge competitor: the United States, which has dominated global oil production for six years.

Crude oil is currently down 3.4% this year at $69.22 per barrel. Just 30 months ago, a barrel of crude oil reached $122 in the United States. Gasoline prices have skyrocketed, with the AAA national average price in the United States reaching $5.016 per gallon in June 2022.

Sunday’s price was $3.042 per gallon, down 2.3% for the year and 40% from the 2022 peak. More than half the country now pays less than $3 per gallon.

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Starting in late November, the big post-election Trump rally began to stall. The Russell 2000, S&P Midcap 400 and S&P Midcap 600 indices reached all-time highs on November 25. The Dow Jones peaked on December 4. The S&P 500 followed two days later. The Nasdaq finally reached its peak on December 16.

One cause was rising long-term interest rates, driven by investor concerns about the financial well-being of the United States. The 10-year Treasury yield was at 3.66% before the Federal Reserve’s first rate cut on September 18. The yield reached 4.6% on Thursday before falling to 4.52%, down 25% from its September low.

Mortgage rates, which track the 10-year yield, jumped above 7% after the Fed said it could make only two rate cuts in 2025, while investors expected four . The worry about the Fed meeting was that rates were done falling. Rates above 7% weigh on home sales and the construction of new homes.

A For Sale sign hangs in front of a home in New York state in June 2024. Newsday LLC/Getty Images

On Friday, two senior Fed officials, Austan Goolsbee and John Williams, suggested the Fed still had room to cut. Goolsbee is president of the Federal Reserve Bank of Chicago. Williams is president of the Federal Reserve Bank of New York.

Their comments sparked Friday’s stock market rally and eased pressure on the bond market. It is unclear whether relief will continue into next week. Normally, you’d expect a Santa Claus rally during the last five trading days of the year.

These will affect the bond and stock markets:

Growing borrowing needs drive up the cost of credit paid by the U.S. government, which affects the entire economy. This is one of the main reasons why interest rates have remained higher than expected since their lowest level in September.
Tariff threats. President-elect Trump wants to impose new tariffs on goods from Europe, Canada, Mexico and China, while insisting they will not spur inflation in the United States.
Mass deportations. No one knows the scope of Trump’s wish.
The effects of possible massive layoffs at the federal level.
Geopolitics. The Ukraine-Russia war continues. The same goes for all conflicts in the Middle East. A hot spot to watch: China and Asia. Over the weekend, Trump called on Panama to return the Panama Canal.

Finally, a little gift to think about: An investment idea that is starting to make a name for itself. This could change computing as we know it in perhaps the not-so-distant future.

It’s called quantum computing, and it revolves around the idea of using quantum mechanics, an esoteric branch of physics, to create incredibly fast and powerful computers.

The field of quantum computing includes a number of disciplines, including quantum hardware and quantum algorithms, to solve problems that a classical computer cannot solve or cannot solve quickly enough.

Quantum computers don’t use bits of electricity to operate. Instead, they work with subatomic particles.

Google has announced a chip that can quickly solve an experiment that the company says would otherwise take 300 million years.

Several companies have gone public to raise money to work on these computers. None are profitable, but they are working to make the technology feasible. The trio is Rigetti Computing (RGTI) IonQ IONQ and D-Wave Quantum systems (QBTS) .

Rigetti manufactures integrated circuits for quantum computers. IonQ is developing a quantum computer. D-Wave sells computers that exploit quantum effects in their operation.

All the big tech companies are playing with this idea. Companies that have used some of this technology include Master Card MA, NEC Corp. (NIPNF) and Unisys (ISU) .

Read more in my colleague Rob Lenihan’s story Analysts Rearrange IonQ, Rigetti, D-Wave Quantum Stock Price Targets Based on Quantum Computing Outlook