The stock market has been on quite the ride lately, and as we look toward 2025, many analysts are buzzing about what the future might hold. The first half of 2024 caught us off guard with narrow advances primarily driven by big tech stocks, but the narrative shifted dramatically by the third quarter. Now, sectors like real estate and financials are showcasing some serious muscle, even outpacing the technology giants.
According to industry experts, there's been notable strength, particularly from the utilities sector, which recently saw its shares rise by 20%. It’s almost as if the investment universe has flipped on its head—who would have thought utilities would lead the charge during a bull market?
One reason behind this sudden surge is the improved economic indicators. Tamer inflation levels are helping consumers regain confidence, as the Fed's favorite inflation measure, the Personal Consumption Expenditures (PCE), posted just 2.2% growth year-over-year as of August 2024. To put this figure in perspective, PCE peaked at 7.2% just two years ago. That’s quite the turnaround!
With inflation showing signs of stabilization, the Federal Reserve has turned its attention toward the labor market, which has seen some shifts—specifically, the unemployment rate creeping up to 4.1% from 3.7% at the beginning of the year. The Fed’s response? Cutting interest rates. Investors could see another rate drop of around 25 basis points at each meeting over the next couple of months. It's all about balancing inflation and growth, and right now, it appears the scales are tipping favorably.
Even though the Fed has historically encountered challenges achieving soft landings—those delicate times when inflation eases without pushing the economy toward recession—many economists believe they’re on the right path this time around. Still, there's caution; recent forecasts have been egregiously off the mark at times, and many are projecting approximately 30% odds of recession next year, which isn't exactly encouraging.
For investors, this uncertainty may induce some restlessness, particularly with the undercurrents of geopolitical tensions, like the possibility of escalation in the Middle East and natural disasters such as Hurricane Helene. By now, it’s almost customary for investors to be on edge as October tends to have this ominous reputation for market volatility.
Yet, the broader picture remains quite positive. The economy is currently enjoying growth around 3%, and coupled with the Fed’s PCE reading being comfortably around its 2% target, the stage appears to be set for continued market advancement. Analysts suggest this combination of factors could serve as tailwinds propelling the markets well beyond 2025.
So, where does consensus land concerning the market’s prospects going forward? Quincy Crosby, LPL Financial’s chief global strategist, is effectively leading the charge. She notes, "There’s no compelling reason for this bull market to surrender to the bear, especially with solid economic support and strong earnings forecasts."
With the major players on Wall Street—like JPMorgan Chase and Goldman Sachs—delivering earnings reports above expectations, it becomes increasingly clear there’s strength beneath the surface. Dubbed the ‘Magnificent Seven’, the largest tech companies have significantly contributed to the market’s success, accounting for 34% of the S&P 500's total return this year.
But as investors cautiously dip their toes back in, there’s also movement toward diversification. Morningstar data shows capital is flowing out of the tech sector and seeking refuge within more traditionally stable sectors such as consumer goods and utilities. Analysts forecast S&P 500 companies may report growth of around 4.2% for the third quarter alone, with big expectations for earnings across the board continuing well through 2025.
The outlook looks bright due to burgeoning corporate earnings driven by consumers spending more, and the prospect of the Fed engineering this so-called soft landing. With prominent financial institutions lowering their recession risk probabilities to 15%, hope is rising.
It’s not just whispers of optimism floating around; historical patterns also back up current conjectures. Since World War II, bull markets lasting two years tend to continue on for at least another year. Some analysts point to the S&P 500 finishing the year higher 83% of the time following October, especially once election outcomes clarify market instability.
Nevertheless, as we step closer to 2025, there are still wild cards at play. This past year and beyond has been marked by unprecedented challenges, attracting skepticism alongside optimism. Navigators of investment waters must remain vigilant and adaptable, keeping both eyes peeled for shifts.
Market experts will continue to monitor inflation measures, economic growth rates, and consumer confidence levels to gauge the sustainability of this current bull market. The overarching hope is for stability to prevail, signaling broader gains beyond technology’s inflated clout, and reshaping the investment conversation heading forward.
