Review of 2024 and the Outlook for 2025
January 6, 2025
By Robert Wiedemer
Significantly Beating the S&P 500: A Stellar 2024
My investment goal for 2024 was to significantly beat the S&P 500, and I’m pleased to report that this goal was achieved. The Main Model delivered a gain of 34%, compared to the S&P 500’s 24% increase.
Throughout the year, we maintained a bullish outlook despite numerous warnings from pundits and analysts predicting a major pullback. As anticipated, while there were some short-term corrections, the market experienced no significant long-term declines. Our Bull Bear Macro Investment System™ proved to be exceptionally effective, enabling us to navigate market fluctuations with confidence.
This year, I don’t expect the market to perform as strongly as it did in 2023 or 2024. However, it is still poised for solid gains and could even surprise us. According to a FactSet survey, stock analysts predict the S&P 500 will rise by 14.8% in 2025. Analysts underestimated the market in 2023 and 2024, and they might do so again. My own estimate suggests the S&P 500 could climb by 15–20% this year.
Below, I’ll review the key factors that should drive a positive market in 2025, along with some risks we’ll need to monitor. As always, if these risks grow or our outlook changes, we’ll adjust our strategy accordingly. At the outset of 2025, however, I remain optimistic. Here are the primary issues influencing the stock market this year, ranked by importance:
1. Interest Rates Are the Biggest Issue -- As Always
Interest rates remain the most critical driver of market performance. For example, in mid-December, market optimism of a Santa Claus Rally was dampened by the Fed Grinch Pinch, when the Fed announced it would only make two rate cuts in 2025 instead of the anticipated four. Thereafter, the market recovered, but as the 10-year rate rose from 4.2% to 4.6% at year-end, it weighed on sentiment.
Long-term rates could climb further as the Fed continues selling bonds, and private investors grow weary of buying them after years of poor returns. For instance, the 20-year Treasury bond ETF (TLT) experienced major outflows in late 2024, signaling declining interest in the bond market.
The Fed’s recent rate cuts have had little impact on long-term rates, which have risen nearly 1% despite a 1% reduction in the overnight rate. While these cuts have lowered money market rates, long-term rates - the ones that truly influence stocks, bonds, and real estate – can continue to remain high. Unless the Fed resumes printing money (buying bonds), long-term rates will likely remain elevated.
However, the Fed is reluctant to do that as they fear a rebound in inflation if they print more money. This dynamic may lead to some stock market pullbacks as the Fed struggles as the Fed struggles against the inevitability of starting up the printing press again. Fortunately, the stock market tends to adapt to higher rates over time, even if bonds and real estate don’t.
2. Massive Deficit Spending Still Boosting the Economy
While long-term deficits pose serious risks, the short-term impact is stimulative. With government borrowing already outpacing previous records, deficits may rise further, providing additional tailwinds for the stock market in 2025.
Many analysts and economists view massive deficits as a negative to the economy and the stock market in the short-term - it isn’t as it is a massive boost to the economy and a key foundational base for stock market growth. A $2 trillion deficit effectively adds a 7% boost to the economy, offsetting challenges like declining home sales and collapsing commercial real estate values.
Of course, long-term, a huge deficit is a huge problem - no need to tell me that. I’ve written best-selling books on this problem. But, for now, the higher the deficit the better for the economy and the stock market. And it looks like we are heading in that direction. In the first two months of this fiscal year, the government borrowed more money than in all of 2016. Wow!
Elon Musk and his DOGE Commission won’t make a dent in any of that. He can only make suggestions. Congress has just shown that if they don’t like his or President-elect Trump’s suggestions, they simply vote them down. Period.
I’ve stated previously, the big problem with the deficit is that the big problems have big political support. They won’t or can’t be changed. In fact, I wouldn’t be at all surprised to see the deficit hit $2.5 - $3 trillion by the end of President-elect Trump’s term in office. As President Trump found in his first term, it’s very hard to control the deficit.
3. The Poor Performance of Competitive Investments Continues
The poor performance of competing investments such as international equities, private investments, bonds, and commercial real estate further strengthens the case for positive allocation to the U.S. stock market.
In 2024, U.S. markets significantly outperformed global counterparts, with the S&P 500 up 24% compared to modest gains of 5.85% for the FTSE 100 and 9.10% for Germany’s DAX. Japan’s Nikkei 225 rose 19.85%, but most of those gains were in the first three months of the year and the gains were much less in USD terms given the double-digit depreciation of the JPY against the greenback for the full year.
Private equity and venture capital also lagged, offering subpar returns and reduced liquidity with difficulty in exiting. Meanwhile, bonds and commercial real estate offered no appeal and are not looking any better this year, as higher rates are causing both to have big risks and negative returns.
As a result, both individual and institutional investors are likely to continue to increase their allocations to U.S. equities.
4. It’s Been Two Years since the Big 2022 Downturn
It’s been two years since the significant market downturn of 2022, and investors have regained confidence. While some rebound momentum may fade this year, strong market performance over the past two years should continue to bolster investor confidence to increase their allocation to the U.S. stock market.
5. Possible Capital Gains Tax Cut
Although I am not very positive that we will see any meaningful spending cuts, I am much more positive that we will see meaningful tax cuts. The one that matters most to stocks is a cut in the corporate tax rate to 15%. As was the case in Trump’s first term, I think this will be an extra boost to the stock market.
To make passage easier it might be combined with the elimination of taxes on tips and Social Security income, which President-elect Trump has endorsed. Simply put, it is much easier for Congress to pass tax cuts than spending cuts.
6. President Trump – He’s Pro-Stock Market and Wall Street Prefers Republicans
Many market analysts highlight President-elect Trump’s proposed policies on immigration and trade tariffs as significant risks to the stock market. I disagree.
For immigration changes to materially impact the economy, they would need to cause a significant reduction in the labor supply—a scenario I find unlikely. This didn’t occur during President Trump’s first term, despite his strong stance on curbing immigration. Additionally, deporting millions of immigrants is far easier to discuss than to implement. Ultimately, I expect the overall labor supply to remain largely unaffected by his policies.
Regarding tariffs, most of the trade measures enacted during President Trump’s first term are still in place. President Biden did not roll them back, and the economy has continued to perform well, partly due to massive deficit spending. This demonstrates that tariffs are not inherently catastrophic for the economy.
How much further tariffs could rise is uncertain. While there’s always a risk of a trade war that could harm the economy and markets, President Trump avoided such a scenario in his first term. I believe he would address tariffs differently if a large trade war begins to materialize during his second term.
While some of Trump’s policies may introduce market risks, I believe his presidency will generally benefit the stock market. In his first term, President Trump demonstrated a keen awareness of market performance and seemed to tie the success of his presidency to the stock market’s health.
In short, Trump is pro-stock market, and Wall Street tends to favor Republican leadership. With a Republican President, Senate, and House in 2025, I expect Wall Street to respond positively to this political landscape.
7. High Stock Valuations Are a Risk
By most conventional stock market valuation metrics, stock values are at or near record highs—a point of concern. If interest rates rise, these high valuations could exacerbate any market pullbacks
That said, I believe the market will recover from such pullbacks. Historically, Wall Street has shown resilience to high valuations, particularly since the Financial Crisis. While high valuations are frequently discussed, the positive factors I’ve outlined earlier will likely outweigh this concern.
However, in anticipation of potential volatility, I significantly reduced our NASDAQ exposure last year. This move aims to mitigate risks stemming from market jitters over high valuations. NASDAQ is particularly sensitive to valuation concerns and has not been significantly outperforming the S&P 500 as it did in 2023 and the first half of 2024.
In the coming months, I will delve deeper into valuation issues, including the growing influence of a handful of highly valued stocks on the S&P 500.
To summarize my outlook going forward: While I don’t anticipate the market will match the stellar performance of the past two years, the S&P 500 should still achieve gains of 15% or more in 2025. We begin the year with a Strong Long stance, leveraging our Bull Bear Macro Investment System™ to adapt to changing market conditions.
As we bid farewell to a phenomenal 2024, let’s look forward to another promising year in 2025!