Market Resiliency Continues into 2025 Despite Election Uncertainty
The past year has been marked by significant market gains, with the Nasdaq Composite (^IXIC) rallying 30%, the S&P 500 (^GSPC) climbing over 24%, and the blue-chip Dow Jones (^DJI) rising a more modest 13%. The Federal Reserve's first interest rate cut in roughly four years in 2024, as well as news of a changing of the guard in the White House, have driven stocks higher. Earnings growth has accelerated, and the market rally has finally begun to broaden.
Bull Market Continues with Record-Setting Year
The S&P 500 clinched 57 records to fall into the top five years for most all-time highs recorded by the benchmark index. Strategists attribute this performance to strong corporate earnings and outsized momentum from several members of the "Magnificent Seven" tech stocks, including chipmaker Nvidia (NVDA), Tesla (TSLA), Alphabet (GOOGL, GOOG), Amazon (AMZN), Apple (AAPL), Microsoft (MSFT), and Meta (META). Earnings picked up across sectors in 2024, with growth finally expanding beyond the "Magnificent Seven" names as other S&P 500 companies exited their earnings recession.
Election Impact on Market
The presidential election has had a significant impact on the market. Donald Trump's victory led to a surge in small-cap stocks, with the Russell 2000 (^RUT) outperforming leading market indexes the day after the election. Small caps have since erased their gains but are still up about 11% since the start of the year. Companies within the small-cap index, including regional banks and smaller domestic players, are expected to benefit from anticipated policies out of the Trump administration like lower taxes and deregulation.
Tariffs and Inflation
The election has also led to concerns over tariffs, which have pushed the dollar higher, a benefit for small-cap companies. However, tariffs are also expected to lead to stickier inflation and keep interest rates higher over the long term. This possibility has boosted long-term Treasury yields, with the 10-year note trading at around 4.6%, a seven-month high.
Bitcoin Soars
Bitcoin (BTC-USD) has been an exception, surging over 130% since the start of the year and remaining one of the biggest beneficiaries of the post-election rally. Trump's administration is viewed as generally friendly to the alternative asset class, with promises to usher in more supportive regulation and appoint a crypto Presidential Advisory Council.
Economic Outlook
The US economy has been resilient throughout 2024, with retail sales topping estimates for the month of November, GDP remaining strong and above trend, and unemployment continuing to hover at around 4%. Despite its bumpy path down to 2%, inflation has moderated. However, the election of Donald Trump has complicated the outlook, with economists warning that the risks are tilted in the direction of higher inflation.
Labor Market
The labor market has also been a focus for the Federal Reserve, which has noted that while downside risks have diminished, the labor market is now looser than pre-pandemic and continues to cool further. The chart below shows how the hiring and quits rates have both moved lower throughout 2024 and now sit at lower levels than seen just before the onset of the pandemic in 2020.
Fed's Easing Cycle
The Federal Reserve lowered interest rates by 25 basis points to a range of 4.25%-4.5% at its final meeting of the year, signaling that it would slow down the pace of its cuts after slashing interest rates by a total of 100 basis points in 2024. Fed officials see the fed funds rate falling to 3.9% in 2025, higher than the Fed's previous September projection of 3.4%.
Strategists Remain Bullish
Despite some concerns over inflation and labor market cooling, strategists remain bullish on the market for 2025. The median target for the S&P 500 sits at 6,600, reflecting a roughly 11% increase from current levels. One strategist sees the benchmark index ending 2025 lower, but most expect it to end the year higher.
Conclusion
The past year has been marked by significant market gains and a changing of the guard in Washington. While election uncertainty remains, strategists are encouraged by the story the charts tell, with corporate earnings expected to keep growing and interest rates expected to remain relatively low. As 2024 comes to a close, individual investors can be optimistic about the prospects for the market in 2025.
This article is intended for informational purposes only and should not be considered as investment advice. Individual investors are encouraged to consult with financial professionals before making any investment decisions.