Finishing Strong

With just over three weeks left in the year, the S&P 500 continues to reach new highs, now up over 27% on the year. Recently, the index has been boosted by solid economic data, lower bond yields, and a late-year surge from some major companies. It is not unusual for strong years to finish strong, but the widespread optimism as we approach the new year is noteworthy. Looking ahead to 2025, there are several potential drivers of growth, including lower interest rates, tax cuts, deregulation, and increased efficiency.

The U.S. labor market, the backbone of our economy, remains very strong. In November, nonfarm payrolls increased by 200,000, a significant rebound from the 12,000 additions in October. This is mainly due to the normalization following hurricane cleanups and the end of Boeing’s machinist strike. Still, the continued strength in job creation is impressive. With unemployment holding steady at around 4.2%, we can be confident in consumer spending. Survey data shows that consumers are increasingly optimistic about their financial outlook. With inflation down and employment stable, personal incomes are rising faster than inflation, which supports stock market performance.

Throughout much of 2024, interest rate cuts were a catalyst for stocks. Although a few more cuts are expected over the next year, the strong economy and persistent inflation in some areas have tempered these expectations. Now, the market is focusing on new catalysts stemming from the Trump Administration’s agenda, such as tax cuts and significant deregulation, which could boost profits next year. Outside of politics, artificial intelligence (AI) continues to offer substantial opportunities for many companies. While it will take time, those at the forefront may start to find lucrative use cases for this revolutionary technology.

Several of the market’s largest companies have seen strong performance towards the end of the year. However, participation has broadened, with more sectors and companies getting involved. This is reflected in broader expectations for growth earnings. In the first half of 2024, earnings growth for the S&P 500 was driven by a few tech and communications companies. Looking ahead, analysts expect financials, healthcare, industrials, and consumer discretionary to contribute more significantly. This is a positive development. However, 2025 is not without risks. Sentiment is high, and expectations are lofty. Several challenges lie ahead, including the debt ceiling, budget negotiations, tariffs, and complex geopolitical situations. With high valuations, it will be crucial for companies to meet or exceed earnings expectations. While they will have some support, execution will be key.

Thanks,
Preston May, CBE®
Research Analyst

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S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.