Cutler Commentary

2025 Market Outlook

January 21, 2025

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1/21/25

2024 capped a remarkable two year run for the US equity market. After a 26.3% gain in 2023, the S&P 500 rallied another 25.02% (including dividends) in 2024. These were the best back-to-back (two-year) gains since the late 1990’s,  a period with striking similarities, including a market driven primarily upon the emergence of a new technology. NVIDIA has been the stock to watch, a company which has transitioned from a video game-focused chip company to an AI chip company. It has grown to be nearly the most valuable company in the world at well over $3 trillion. NVIDIA has gained over 800% these past two years! 

Mentioning the late 1990’s is a dangerous game as a market commentator, as it brings to mind the internet bubble and subsequent burst. Alan Greenspan famously decried, “irrational exuberance” and while it took several years after his initial warning, we all know that bubble eventually did “pop.” Does today’s emergence of Artificial Intelligence harken a similar fate? Notably, while NVIDIA’s growth may one day dissipate, it has grown earnings at a remarkable rate. Big tech is buying their chips in spades. Thus, while their valuation may be expensive, it is supported by earnings growth. The Magnificent 7, with returns that may seem unsustainable, have for the most part grown earnings alongside this stock market.

Caveat emptor, however, as we aren’t sailing into 2025 without any market risks. While we don’t see an internet bubble brewing, loose money coupled with new opportunities have created speculative pockets that investors should be wary of. The animal spirits of risk-seeking behavior are in full swing; cryptocurrency, quantum computing, and artificial intelligence are all buzzwords attracting money from all corners of the market. All of these have vast potential, but as with any new gold rush they all come with significant risks.

Most market forecasts are calling for positive gains in the coming year. And while forecasts are wrong more often than right, they may give us confidence in the direction (not the level) that we might plan for. The economy is sound. So sound that inflation has remained stubbornly above the Fed’s 2% target, despite considerably more restrictive Fed policy than in any economic cycle this century. After November’s election, the Fed implemented a “hawkish cut” which entailed a 0.25% reduction in the Federal Funds rate and a simultaneous readjustment of Future Fed forecasts. For 2025, instead of the four interest rate cuts the market planned for, the FOMC now believes just two will be appropriate.

The bond market has taken notice. After a miserable 2022, and an unimpressive 2023, in 2024 bonds once again gave investors little confidence to invest in this asset class with a return that trailed even cash. The Bloomberg Aggregate index had a paltry 1.3% return for the year. While Cutler’s philosophy is not fundamentally based upon a contrarian approach, the return potential for bonds looks enticing at these levels. We believe your expected returns in fixed income are the yield-to-maturity (YTM) at the time of purchase and today you can buy a 10-year Treasury near a 4.7% YTM. That’s near their highs of the past twelve months and also near the long-term peak in 2006 – nearly 20 years ago! Should stocks falter, bonds are an important portfolio diversifier. While we aren’t recommending a bond overweight, we think investors should look to rebalance portfolios that have become increasingly growth-equity heavy. Trimming back some of these gains, while maintaining stock exposure is a prudent investment approach at this time.

 -Your Cutler Team

The information contained in this outlook is for general education only and the opinions are those of Cutler as of 1/21/2025, and do not constitute a recommendation or solicitation to buy or sell investment products. For a comprehensive review of your personal situation, always consult with your financial advisor and/or appropriate tax or legal advisor.

 

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Disclaimer

These blogs are provided for informational purposes only and represent Cutler Investment Group’s (“Cutler”) views as of the date of posting. Such views are subject to change at any point without notice. The information in the blogs should not be considered investment advice or a recommendation to buy or sell any types of securities.   Some of the information provided has been obtained from third party sources believed to be reliable but such information is not guaranteed.  Cutler has not taken into account the investment objectives, financial situation or particular needs of any individual investor. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor's financial situation or risk tolerance.  Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary. No reliance should be placed on, and no guarantee should be assumed from, any such statements or forecasts when making any investment decision.
 

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