We hope everyone is having a great start to 2025. Our thoughts are with clients and friends affected by the LA fires this month.
As 2025 begins, many have asked about market predictions for the year and how the new Trump presidency might impact our investments. And while we do expect policies from the new administration to affect certain aspects of the markets and the economy, it’s important to remember that most analyst predictions that try to forecast the annual return of the S&P 500, frankly, are abysmal.
As the chart above shows, all the major Wall Street brokerage and bank strategists failed to anticipate how well the market would do in 2024. Strategists don’t do these forecasts exceptionally well, but this year, they were extra-terrible.
So while we won’t be making any year-end predictions, January has given us a sneak preview of what will be moving the markets this year.
There Is Finally an Alternative to Stocks
Like we mentioned in a prior note, even though the Fed has been lowering short term interest rates since last fall, the yield on the 10-year bond (the benchmark for borrowing costs for mortgages, loans to businesses etc.) has done nothing but go up. If rates continue to rise toward 5%, expect the stock market to get jittery. Why? Because at 5%, bonds suddenly become an compelling alternative to stocks.
“A few years ago, when yields were 1%, they didn’t compete with equities because there was no alternative,” Jurrien Timmer, director of global macro at Fidelity Investments, said in an interview with Yahoo Finance. “But now, at 5%, or four and three quarters, and the equity market having a similar earnings yield, stocks have to compete with what we consider the risk-free asset.”
Why Rising Bond Yields Are Such A Problem For Stocks
The Magnificent 7 Still Run the Show
If you had a time machine and could fast forward to 12/31/25, you could probably get a pretty good idea of how the market did by just knowing the earnings growth of 7 stocks – Apple, Alphabet, Meta, Tesla, Nvidia, Microsoft, and Amazon. They simply are the market now and their dominance isn’t fading anytime soon.
The “magnificent 7” have been the driving force behind S&P 500 returns over the last 3 years. On the left, we break out the performance of the Mag 7 and the rest of the S&P 500. While the Mag 7 stocks contributed 63% of the positive performance in 2023, they also contributed 46% of the negative performance in 2022.
Stargate Project – The Future of AI and the US Economy?
Last week, we got a look at what could be the next economic game-changer. The Stargate Project, announced by the Trump administration, is aimed to develop AI infrastructure in and make the United States the global leader in the technology. If enacted as planned, it’s a whopper. 100,000 potential new jobs, major innovations in technology and healthcare, and a new bedrock of the American economy.
What exactly is Stargate? It’s an expanded version of a massive AI supercomputing initiative already in progress. The plan involves a joint venture between Oracle, OpenAI, and Japan’s SoftBank, with an initial $100 billion investment and a possible $500 billion over the next four years.
Stargate’s launch represents more than just an unprecedented financial commitment to AI development. It marks a defining moment when artificial intelligence moves from being merely a technological pursuit to becoming a cornerstone of national strategy.
Brace For More Volatility
Investors have been somewhat spoiled the last couple of years compared to market history. Average intra-year drops of 14.1% have been the average in the S&P, with 20%+ drops in 2018, 2020, and 2022. If January is any indication, we might be in for a rougher ride in 2025.
As some of you might be aware, last weekend a new AI program called DeepSeek was released by a Chinese startup. The kicker? DeepSeek stated that their program, purported to be just as robust as ChatGPT, was created at a fraction of the cost and with minimal computing power. Some, like Elon Musk, have expressed some skepticism that these claims are true. But still, the release alone was good enough to knock shares of Nvidia down by 17% this Monday, the biggest loss in market cap of any stock ever. More to come on this next month.
While we’re bullish on the economy and opportunities in the markets right now, if January is any indication we might be in for a bumpier ride in 2025.
And finally, we saw some wild videos after the snowstorm that hit the south last week. While snow on the beach in Florida is one thing, ice hockey on the streets of downtown New Orleans is another altogether. Laissez le bons temps rouler indeed.
A Hockey Player Laced Up on the Frozen Streets of New Orleans
