2025 a Year of Change
As we step into 2025, I wanted to share insights from our investment team. Reflecting on 2024 and analyzing the stock market, individual equities, bonds, the economy, monetary and fiscal policies, and geopolitical risks, we believe 2025 will usher in a period of transformative change. While challenges are expected, we remain optimistic about the opportunities this new year brings.
Reviewing 2024: A Year of Contrasts
The economy in 2024 was largely driven by fiscal spending, with monetary policy appearing restrictive due to an inverted yield curve for part of the year. However, longer-term Treasury yields rose slightly above short-term ones as the Federal Reserve significantly reduced the Federal Funds rate.
The S&P 500 had an impressive year, rising 23.3%, but bond markets struggled. The Barclays Aggregate Bond Index delivered a modest 1.3% return, despite declining interest rates. In contrast, short-term Treasuries performed well.
Equity market performance was notably narrow. Fewer than 30% of S&P 500 stocks outperformed the index, and the Equal-Weighted S&P 500—treating all 500 stocks equally—posted a 12.8% return. The top 10 companies in the S&P 500 now account for a record 38.9% of its weighting, underscoring the market’s concentration risk. A significant decline in these companies could have an outsized impact on overall market performance.
Our Outlook for 2025
We approach 2025 with cautious optimism. While the stock market appears highly valued, there are numerous attractive opportunities across sectors and market capitalizations.
The new Trump administration will likely pursue policies aimed at fostering private sector growth, in contrast to the government-driven strategies of recent years. This shift may help broaden market performance. All 11 stock market sectors are projected to achieve positive earnings growth in 2025, with slower growth anticipated for the mega-cap technology stocks that dominated in 2024. Mid- and small-cap stocks, as well as quality blue-chip equities, present compelling valuations.
However, the anticipated reduction in federal spending and potential clawbacks of prior fiscal initiatives could create a "fiscal cliff." The timing of reduced government spending and private sector recovery will be critical, potentially triggering recession fears at some point in 2025.
Key Themes to Watch
- Federal Reserve Policy: While rate cuts are on pause, the Fed's hawkish stance could contribute to market volatility. Inflation trends and the 10-year Treasury yield, currently around 4.5%, remain key indicators.
- Geopolitical Risks: The administration’s tougher stance on Iran and Russia, coupled with potential trade zone collaborations between Latin America and North America, could shape market sentiment. Energy prices are a wild card, with possible disruptions and opportunities for U.S. energy providers.
- Market Breadth: The sustainability of the bull market depends on broader sector participation. A failure to diversify away from technology dominance could heighten the risk of a significant market downturn.
- Regulatory and M&A Climate: Reduced regulatory barriers and a revival of mergers and acquisitions may positively impact the private sector, unlocking untapped growth potential.
Positioning for Change
Given these dynamics, we anticipate heightened market volatility in 2025. Our investment strategy prioritizes long-term durability and resilience, incorporating an attractive distribution yield to cushion against potential market weakness. We have selectively increased exposure to promising areas, ensuring alignment with our disciplined risk-return framework.
As opportunities arise, we are prepared to act decisively, leveraging change to strengthen portfolios and achieve sustainable growth. We look forward to navigating this transformative year alongside you.
Our Best Always,
Bob
Robert O'Braitis
CEO
Chief Investment Strategist
