The Market Pulse in Charts
A Rapid-Fire Look at Market Conditions to Start 2025
Happy New Years!
I hope you all enjoyed the holidays and that your last day of 2024 started out better than mine.
Blackouts are par for the course in Puerto Rico. The decaying power grid has never recovered from Hurricane Maria in 2017. Meanwhile, creditors are still fighting over how to restructure $9 billion owed by the Puerto Rican electric company that filed for bankruptcy in 2016.
Losing power is a part of island life. Fortunately, we have beautiful beaches to flock to when the AC stops running. It was one of the most crowded beach days I’ve seen in my four-years of living in Puerto Rico.
The power outages didn’t stop the New Year’s celebrations either. Fireworks lit up the sky in the most incredible displays I’ve ever witnessed.
(Video credit to my friend Gordon, I was too busy watching.)
It was a fun way to start the year, but now it’s time to start mapping out The Profit NOMAD PRO playbook for 2025.
I’ve got a backlog of charts that will give us an idea of the starting conditions for markets in 2025. I’m going to share the charts in rapid fire with a few comments in between.
The goal is to get a broad read on the market conditions, gauge market sentiment, and assess the macro environment. You should expect to see an issue like this on a monthly basis.
Let’s go…
Here’s the lead. I think markets are due for a correction, if it hasn’t already started.
The perma-bears can probably find reasons to claim we’re approaching a recession, but I just don’t see it.
Sure, there are risks on the table (more on those later). But that’s always going to be the case.
The economy has remained resilient in the face of higher rates and the Fed is taking its foot off the brakes.
Economic growth came in at 2.8% in Q3 and is projected to be 2.7% for all 2024 (real GDP). Jobs growth may be slowing, but we’re still at historically low unemployment rate.
If a stock market correction happens soon, then it will most likely be a non-recession correction.
These have historically led to a -15.4% drop for the S&P 500 that lasts just under 100 days, on average.
The S&P 500 is currently trading about 4% below its all-time closing high of 6,090 on December 6.
The Fed started cutting rates four-months ago. Stocks are trading like this will be another “soft landing” with no recession and I agree.
If we get a correction, I’ll be buying the dip.
The current market narrative is questioning whether the bull market is sustainable.
Stocks just logged back-to-back gains north of 20% for the third time in 75-years.
The first time was in the 1950’s. It was followed by a flat year and then a double-digit correction.
The last time was in the 1990’s when the S&P 500 strung together four consecutive years of 20% returns (1995-1998) and narrowly missed a 20% return in 1999. Of course, we know happened next. The dot-com bubble burst.
A third-year of +20% returns may not be probable, but it is possible.
Another 1990’s comparison making rounds is the relative outperformance of the market-cap weighted S&P 500 to the equal-weighted S&P 500 index in 2023 and 2024.
The only consecutive years with a higher combined outperformance was 1998 and 1999.
The main reason behind outperformance of the market-cap weighted index is the concentration of the top. The ten largest stocks now make up a 40% of the S&P 500’s market cap.
These ten stocks stocks added over $7 trillion in market cap last year. They’re valued at $20.9 trillion, which is more than the entire European stock market at $16.9 trillion. (Hat tip to the KobeissiLetter for this stat.)
Foreigners have been big buying American stocks at record pace, which helped set another milestone. The market cap of US stocks now makes up an 75% of the MSCI world index – an all-time high.
The previous record was the “Nifty-Fifty” large cap stocks in the 1960s and 1970s, the latter of which ended up being a lost decade for stock markets. The bears also point to the collapse of Japanese stocks after hitting 40% of the MSCI index in the 1980s.
If you want more bear chart porn, then look no further than the Buffet Indicator measuring the total market cap of US stocks relative to the size of the economy (GDP).
This ratio broke through 200% for the first time. The so-called fair valuation is around 75%-90%.
Another warning sign comes from the Shiller PE ratio, which calculates valuation based on the current stock price relative to a company’s average inflation-adjusted earnings over the past ten years.
The Shiller PE ratio for the S&P 500 is currently at 36.9 or more than double the historical average of 17.5.
Valuations are historically high, as are earnings expectations.
Going into the new year, the S&P 500 is trading 24.8 times expected earnings over the next 12-months, according to LSEG. The long-term average is 15.8.
These last several charts help put the longer-term trend in perspective, but they aren’t good for market timing.
Valuations can stay elevated for long periods of time. We could certainly see more earnings multiple expansion. It’s impossible to predict the top.
The last two years have been excellent for the momentum trade with growth stocks.
The S&P 500 never closed below it’s 200-day moving average last year. That has only happened 11 other times since 1952.
Six times the index was up the following year, but the last two times (2017 & 2021) were followed by sell-offs.
History also suggests that the third-year of a bull market is the weakest.
That said, the two-year run in stocks (that started right in line with the launch of ChatGPT) has only seen a 64% rise in the S&P 500.
That’s 184% lower than the average return of the last ten bull markets and less than half as long.
Wall Street analyst projections range from a 9%-to-19% return for the S&P 500 this year.
The most bearish of these forecasts would still be an average year for stocks, but the experts don’t have a great forecasting track record either.
In fact, last year was the fourth time in the last five years that Wall Street analysts were too pessimistic at the start of the year.
The reason I think we’re do for a short-term correction is because market sentiment is stretched after a strong post-election rally.
US Equity ETF’s saw an inflow of $149 billion in November – the largest monthly inflow in history.
The betting markets favored a Trump victory for most of 2024 and that is reflected in the sector investment returns as well.
Financials, Industrials, and Tech had the largest ETF inflows. These are the sectors that will benefit the most from deregulation and strong economic growth.
Energy was the worst performing sector. Trump’s “drill baby drill” push could keep a lid on fossil fuel prices, while repealing the Inflation Reduction Act would limit green energy growth.
Health Care was the second worst sector. There’s a lot of uncertainty around the impact of incoming leaders of major health agencies, as well as where the new Department of Government Efficiencies (DOGE) will make cuts.
Investors have been pricing in the “Trump trade” and there’s no shortage of market bulls.
According to the Conference Board surveys, households have never been more confident that stocks will rise over the coming year. The survey started in 1987.
As Jim Bianco pointed out in mid-December, if the University of Michigan survey is accurate then people appear to be FOMO-buying stocks.
And Bloomberg’s Simon White shows that households now have the largests allocation to stocks of all-time.
On the other hand, company insiders were selling into the rally at the fastest pace in two decades.
There’s a lot of reasons for insiders to sell. Often times it’s part a pre-set plan. But it also makes sense that insiders would be taking some profits after another strong year.
There was clearly some profit taking going on in the last week of the year.
But it’s not just retail investors that are optimistic optimistic about the Trump economy.
The Business Roundtable survey of CEO’s jumped by 12 points last quarter to its highest level in over two years.
80% of the large business group’s CEOs expect higher sales in the next six-months (up from 71% in Q3).
40% expect to increase capital spending compared to 35% in the previous survey.
Small-business owners are also feeling more confident following the election. The NFIB’s optimism index had biggest one-month gain in the survey’s 40-year history.
According to NFIB’s Chief Economics Bill Dunkelberg, “Owners are particularly hopeful for tax and regulation policies that favor strong economic growth as well as relief from inflationary pressures. In addition, small business owners are eager to expand their operations.”
The people running American businesses are optimistic that Trump will give a boost to the economy by slashing regulations, lowering taxes and containing inflation. The question is how much of this already priced into the markets.
The Trump honeymoon with the stock market could be coming to an end. Now it’s time to see how he follows through and assess the impact of all his policy ideas.
The Deutsche Bank 2025 global financial market survey shows that a trade war is seen as the biggest risk for 2025, followed by concerns of a tech stock plunge, sticky inflation and rising bond yields.
Most investors seem to believe that Trump is talking tough on tariffs as a negotiation tactic. However, his first term of presidency was a tit-for-tat trade war that resulted in about 60% of US-China trade being subject to a 20% tariff.
This time around Trump has made multiple threats, including a 60% tariff on China and blanket 10%-20% on imports from other countries.
More recently, Trump promised to put in place 25% tariffs on all imported goods from Mexico and Canada, with an additional 10% for Chinese goods.
American consumers paid for the tariffs in Trump’s term according to several research papers.
If Trump follows-through on his tariff plans this could become a big issue for inflation.
We’ve made a lot of progress on inflation since the Covid highs, but it remains above the Fed’s 2% target. A trade war would be a tailwind for consumer prices that could keep inflation stubbornly high.
Another potential source of inflation could come from Trump’s mass deportation plan for immigrants.
More than eight million immigrants have flooded into the US over the last four years – the largest influx in generations. A lot of these immigrants are working under the table and in low-wage jobs, such as construction laborers, housekeepers, cooks, landscapers and janitors.
Reversing immigration could cause a spike in wages and inflation.
The recent loosening of monetary policy is another concern for inflation. Typically, inflation will rise about six-months after the first Fed rate cut. There’s already been a small uptick, but we could see more pressure starting in March.
Rising inflation will put pressure on bond prices, driving up interest rates.
And that is just one reason for investors to be concerned about interest rates.
I have so many more charts I want to share with you, but I think it’s time to wrap this up.
Overall, I think these charts give a mixed view of the market for 2025. There are certainly macro risks associated with Trump’s plans, one of which I haven’t covered yet.
I’m all for cutting the bloated government spending, but it’s important to realize that fiscal spending is a big reason why the economic growth remained strong during the latest Fed rate hiking cycle.
Hundreds of billions of dollars have flooded into the economy through the Inflation Reduction Act, CHIPS Act and Infrastructure Act. Not to mention all of the pandemic stimulus payments that kept household cash levels elevated and helped fuel the 2021 stock run.
I hope that Elon Musk can accomplish great things with DOGE and it will put the US on a better fiscal path. But slashing government spending will initially be a headwind to economic growth.
The key for investors is to not be short-sighted. See every country in modern history that has turned towards free markets with less government regulation as an example. Taking the medicine may cause some pain, but we’ll be better off in the long-run.
Of course, I’m also being overly optimistic that Trump’s team will really make big cuts to spending. That’s certainly not what happened in his first term.
Here’s to hoping that Musk can do something similar to when he took over Twitter and fired 70% of the staff. Yet, the app still functioned and they’ve completely overhauled and rebranded it as X.
As always, there’s a lot to be uncertain about markets in 2025.
Valuations are historically high, but that’s no reason for the party to stop. Sentiment is stretched and the Trump honeymoon may be fading.
Trump should be good for the economy, but he poses a lot of risks too. That’s why we should probably expect more market volatility than the last two years.
There’s a chance that we see a non-recession correction soon, but I don’t see any reason to believe the bull market will end. There are many strong tailwinds, such as the AI Revolution, that can propel stocks higher even in the face of political risks.
My tactical investing plan for will continue to be momentum trades with tight-stop losses. And I will also look to take advantage of any volatility to buy fundamentally cheap companies positioned to take advantage of trends with strong tailwinds.
If you want to follow along, you can subscribe for to my substack. I’m currently making all of my actionable investment recommendations available to all subscribers for FREE.
I hope you enjoyed this edition of The Market Pulse.
To profitable journeys ahead!
Jake Weber
The Profit Nomad
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