What to Expect from Markets in 2025
Stocks dropped last week, not so much because earnings were bad, but instead because they weren’t as good as markets at these levels demand and that offers us a potential preview into what this market could be like in 2025. To be clear, I’m not saying I think stocks will drop in 2025 like they did last week. Whether they extend the rally will be determined by growth, the Fed, earnings and politics/geopolitics.
What I am saying is that bulls will enter 2025 with a much higher bar to surpass to send stocks higher. Think of it this way. The rally in stocks in 2023 was driven, mostly, by hope of market friendly events: The end of rate hikes and start of rate cuts, the economy slowing to a soft, not hard, landing, AI profit explosions and positive geopolitical resolutions.
The rally this year has been driven by the partial realization of those hopes: Growth did slow but didn’t contract (soft landing), the Fed did aggressively cut interest rates, AI demand and excitement didn’t waver and geopolitical crises didn’t get worse (although they didn’t get better).
As we enter 2025, the question for markets is whether the positive events realized in 2024 can last. Does the soft landing stay in place or does it deteriorate? Does the Fed keep cutting rates or do they pause? Does inflation fall to 2% or rebound? Do pro-growth policy hopes get realized?
Given the market’s run, investor expectations and the fact that these events are in place now, we need to expect substantially more volatility around these topics in 2025, like we saw last week. Here’s how this relates to last week’s data and price action. The CPI and PPI (inflation data) data was mixed and a bit misleading, given headline spikes. But if you look past the headlines to the parts the Fed watches, the data was solid and it wasn’t hawkish and that mixed message contributed to volatility.
Similarly, tech earnings last week were mixed. End users of AI such as ORCL and ADBE posted underwhelming results. AI chipmakers (AVGO) still had strong earnings. On one hand, AI chip demand remains high (bullish). On the other, if AI doesn't make end users more money, chip demand won’t last.
Here’s the point: The fundamentals of this market remain broadly positive with growth solid, ongoing Fed rate cuts and pro-growth policies looming. But while the underlying fundamentals of the market are positive, we all need to brace for more volatility in 2025 and realize that volatility can exist in a still-positive market set up, as long as growth is solid, the Fed is still easing and there are no major political disruptions.
We will discover in January some of the nuances of that growth.
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