Q1 2025 Market Intel Report | Thriving Through High Valuations and Policy Changes

Stocks boomed again in 2024, delivering a strong performance powered by interest rate cuts and hopes for economic growth.

Can the bull market keep running? Is a correction hiding around the corner?

We'll dive into what happened in the final months of 2024 and what we might see in the first months of 2025.

Advisory services are provided through Prosperity Capital Advisors LLC (“PCA”) an investment advisor registered with the United States Securities and Exchange Commission (SEC). Views expressed herein represent the opinions of PCA and are not intended to predict or depict performance of any particular investment.

All data provided, including any reference to specific securities or sectors, is provided for informational purposes and should not be construed as investment advice. It does not constitute an offer, solicitation, or recommendation to purchase any security. Consider your investment objectives, risks, charges and expenses before investing. These views are as of the date of this publication and are subject to change. Past performance is no guarantee of future performance.

Chapters

• 0:08 2025 Market Outlook and Investment Strategy
• 9:10 Risk Management and Long-Term Investing

Transcript

Speaker 0: 0:08

Hello everyone, this is Dave Allison, founder and CEO of Allison Wealth Management and Prosperity Capital Advisors, and I want to welcome you to our Q1 2025 Market Intel Report. 2024 had a lot to celebrate Inflation finally dropped to more normal rates, economic growth was strong, interest rates fell and markets soared to new highs. In fact, 2024 is an example of why staying invested through rocky markets has historically paid off for long-term investors. However, after markets have now boomed for two years in a row, it's natural to ask should we brace for a rocky 2025? Now we know the past doesn't predict the future and none of us have crystal balls, but we can take stock of the market environment and make educated guesses.

Speaker 0: 1:11

There's a lot of reasons for optimism in 2025. Many analysts believe markets will have another strong year, including those who were recently predicting a downturn ahead. If consumers continue to spend, companies continue to invest and the economy continues to grow, we could absolutely see another strong year for markets. But there's also some challenges ahead. Markets hit multiple record highs in 2024, giving us some very high valuations. That often means markets are primed for a correction if earnings and business expectations don't keep up. There's also uncertainty around inflation, the Fed's next move and the new administration's priorities. If tariffs cut into business profits or inflation surges again, investors could get spooked and cause markets to retreat sharply. The bottom line we're monitoring economic data, we're watching for opportunities and we'll keep you informed throughout the quarter and reach out as needed with any strategy shifts.

Speaker 0: 2:32

Now to recap 2024, the S&P 500, which are the 500 largest companies in the United States, rose by about 25%. The United States rose by about 25%, marking the second consecutive year of 20 plus percent gains, as we experienced almost a 26.5% gain in 2023, coming off the downturn, of course, in 2022. Despite the uneasiness investors may feel following periods of strong returns, history shows that stocks often continue to perform well in the subsequent year. Prior to 2024, there were eight instances of back-to-back 20% gains since 1950. 20% gain since 1950. The average return in the following year was a healthy 12.3%, and in only two instances did the index fail to deliver a gain. Further support can be found in expectations for continued economic strength and robust corporate earnings growth in 2025. Now, that said, as is often the case in investing, the path is likely to be bumpy and include pullbacks along the way.

Speaker 0: 3:57

Financial markets responded positively to the results of the 2024 US presidential election pricing, an optimism that tax cuts and a looser regulatory environment will be supportive of both the economy and corporate earnings. However, there are several policy proposals that could prove to be material headwinds in 2025 and beyond. Now, the extent and implementation of these policies remains uncertain. Critics argue that broad, sweeping tariffs and mass deportation could prove to be not only inflationary but also weigh on economic growth. Additionally, some of the tailwinds that we're considering are, of course, the tax cuts, as Trump aims to extend the Tax Cuts and Jobs Act of 2017 and introduce additional cuts intended to stimulate economic growth and boost corporate earnings. We look at deregulation and a looser regulatory environment, which is expected to boost economic growth, corporate earnings and small business profits by reducing compliance costs. And then, last but not least, just general stock market optimism. We know this incoming administration is largely perceived to be pro stock market, viewing the performance of the S&P 500 as a measure of the administration's success.

Speaker 0: 5:30

Now, of course, there's also the headwinds mentioned trade tensions, proposed 20% tariffs on imports that could increase costs for American households and spark retaliatory measures from trading partners. Deficit concerns, tax cuts and increased spending would likely add to the already large national debt, potentially impacting long-term economic stability and labor market tightening, of course, plans for large-scale deportations, which could reduce labor supply, potentially driving labor costs and inflationary pressure higher. These are all things that are risks to the market and if we do see a resurgence of inflation, it could cause the Fed to continue to pause on potentially cutting interest rates. We've already seen some of that in action. Many people thought we might see four interest rate cuts in 2025. Now people are talking about potentially two cuts, again a higher for longer rate environment, and we are seeing continued geopolitical risks that could spook the market.

Speaker 0: 6:45

But there's also an incredible amount of optimism. What we're seeing is continued innovation from some of America's best companies, not just the magnificent seven tech companies that have seen a lot of tailwinds with AI spending and data warehouses and infrastructure build out, but hopefully a broadening of the markets. Some people have speculated that we could be entering into another technology bubble similar to what we experienced in 2000. And at this point we're not quite at those valuation levels yet. There's also another material difference that the tech companies that do have very high values right now have huge abilities to produce cash and earnings, which is a bit different than what we saw in the 2000s, but from a mitigation perspective. It just shows the importance of diversification. Again, if you look at broad market indexes in 2024, the NASDAQ did really well, the tech heavy led NASDAQ, followed by the S&P and lastly the Dow.

Speaker 0: 8:01

If you look at periods like 2000 to 2009, when the dot com bubble burst, the S&P 500 saw pretty much a lost decade for stock market returns Cumulatively over that 10-year period from 2000 through 2009, the S&P 500 was down cumulatively about 10%. But if you were diversified and you looked at asset classes like small cap or value or even the S&P 500 on an equal weight, there were plenty of opportunities to generate return. As an example, during that same period where the S&P 500 market weight index was down cumulative about 10%, the equal weight of the S&P was up about 65%. If you went to the small or mid-cap sector of the United States market, it was up around 50% cumulative during that time period. And if you looked abroad in developed international and emerging markets, you saw even stronger returns.

Speaker 0: 9:10

And so the narrative of all of this is eliminating, reducing and managing risk through diversification and sticking to your long-term investment plan, having a bucket plan, having the proper funding in your now and soon bucket so that we can weather any of the short-term volatility. That is just a normal cost of investing. So, with that being said, that wraps up our Q1 2025 market intel report. If there's anything you need, please reach out to our team, reach out to your advisor. We're here to help and we'll see you next quarter.