Air Out of the Ball

With the S&P 500 up over 24%, it has been an exceptional year. However, participation has increasingly narrowed over recent weeks, and the average stock has taken a notable step back. The S&P 500, when equally weighted, is down a little more than 5% from the start of the month. Commentary dialing back expectations for future cuts to the Federal Funds rate has also increased pressure on the broader market. Still, the foundation for stock performance remains strong. Consumers are working and spending, and earnings expectations are robust. If companies meet their growth targets, markets can continue to rise in the coming year.

The Federal Reserve moved forward with another 0.25% point cut to the Fed Funds rate this week. Although this move was expected, a shift in the outlook for 2025 surprised many. With inflation proving more persistent than anticipated, Federal Reserve Chair Jerome Powell cautioned against expecting a series of additional cuts next year. Inflation is well off its highs but has stalled above the Fed’s 2% target in recent months. Housing and services remain the trouble spots. With rates likely to stay higher for longer, the mix of leading stocks has begun to change. Money is moving towards companies with the most visible growth opportunities. Mega caps, the largest companies worth over $200 billion, are back in favor.

Though higher rates are a tougher challenge, 2025 still has potential catalysts. Tax cuts are at the top of the list. President-elect Trump prioritizes extending the individual and small business tax cuts from the 2017 Tax Cuts and Jobs Act (TCJA). He also supports further cuts to the corporate tax rate for U.S.-based companies. These measures could meaningfully boost profits for a wide array of companies. Deregulation is also a key theme for the incoming administration. Several industries could see an earnings boost from less red tape. Artificial Intelligence (AI) continues to drive business activity, with investments in infrastructure and early adoption representing growth opportunities for many companies.

If one thing is certain in 2025, execution is critical. Valuations are not extreme, but stocks are not cheap. Stocks can rise if the S&P 500 hits its 14% earnings growth target, but there is a near-term risk if they fall short. We remain focused on the management teams we believe are consistently building fundamental value over the long run.

Thanks,
Preston May, CBE®
Research Analyst

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This report was prepared by Donaldson Capital Management, LLC, a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Information in these materials are from sources Donaldson Capital Management, LLC deems reliable, however we do not attest to their accuracy.

An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance to certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown. Past performance is not a guarantee of future results. The mention of specific securities and sectors illustrates the application of our investment approach only and is not to be considered a recommendation by Donaldson Capital Management, LLC.

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.