Taking Stock

As we embark on the last year of the first quarter of the 21^st century, it seems appropriate to take stock of the situation. Looking backward, if you were long mega cap tech stocks, gold or Bitcoin, there was plenty to smile about in 2024, but otherwise, it was a less than stellar year. Looking forward, the record melt-up of the last few years was driven more by valuations (expanding P/E multiples) than by earnings growth. Does that imply the bull is dying? Of course not. Another strong market year in 2025 is not out of the question. Valuations can always go higher than most anyone imagined, which is simply translated as valuations don’t kill bull markets.

One of the things we look at for some guidance is expected earnings growth. In 2025, the mega cap tech stocks are estimated to grow faster than the rest of the market, but that growth is decelerating. It is an open question whether this growth has been fully priced in.

On the other hand, for the rest of the S&P 500 index stocks, earnings growth is accelerating, albeit at rates still somewhat lower than mega cap tech companies. Given the recent underperformance of the other 493, it is not without logic to look to these stocks to perform better. In short, another strong year does not have to look anything like the last strong year. The implication is that 2025 may (finally) be the year when the stock market performance is not dominated by a handful of tech stocks.

What could trip the market up?

Each year, Deutsche Bank releases a global investor survey with one of the questions being “Which, if any, of the following do you think pose the biggest risks to market stability in 2025?”. Respondents were allowed to choose as many as three responses. Here are the results.

For 2025, the big risks are identified as:

• A global trade war (which wasn’t on the list a year ago)
• A plunge in tech valuations (which was also one of the more pronounced risks in 2023)
• And, central banks unexpectedly raise rates as inflation is sticky

I think we can agree these are all predictable responses. The question is should we put any stock into these responses. To answer that, we point to the 2023 responses, when the survey incorrectly ranked a hard economic landing as the number one risk for 2024. In our experience, bull markets end when something comes out of the blue, or at least appears to come out of the blue. Most of the time, big events that are widely anticipated don’t have much impact simply because they were widely anticipated. It is generally the things just under the surface, recognized by only a few, that have real impact.

The bottom line is that nobody knows what is going to happen and because of that it is important to stay invested in a portfolio that addresses your risk tolerance.

Have a great week!

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All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

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By: Adam