As we look back at the financial landscape of 2024, it is evident that the high-interest environment has not stifled the stock market's growthIn fact, the U.Sstock indices have consistently reached new historical peaksThe S&P 500, Nasdaq, and Dow Jones indices appreciated by 26.5%, 28.0%, and 19.2% respectively by the end of NovemberAlthough there have been some fluctuations during the year, the overarching trend has been one of upward momentumA critical aspect contributing to the stock market's resilience has been the robust performance of the U.SeconomyFor instance, in the first three quarters of 2024, the annualized quarterly GDP growth rates recorded were 1.8%, 3.0%, and 2.8%, underscoring the economic tenacity that has propelled stock performanceBy November, the S&P 500's earnings per share (EPS) had risen by 7.9% compared to the end of 2023, showcasing a positive outlook
Furthermore, despite the historically high interest rates throughout the year, valuations did not come under severe pressure; by the end of November, the S&P 500's price-to-earnings (P/E) ratio had reached 27.0, a 17.2% increase from the end of 2023.
Looking forward to 2025, with macroeconomic factors for the U.Sstock market such as interest rate cuts and reduced inflation risks gradually coming into play, we can anticipate that a confluence of "interest rate cuts" and the onset of a "2.0 era" will drive further upward movement in the markets.
The Federal Reserve's cautious approach to easing interest rates is likely to maintain the resilience of the U.Seconomy, with a "soft landing" scenario still being the foundational expectation
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The risk appetite in the stock market seems poised to continue expanding, leading to a turbulent but upward trajectory throughout 2025. Since the latter half of 2024, the "interest rate cut trade" dialogue within U.Sequities has encountered some ups and downsHowever, if we widen the time frame to the next year, interest rate cuts remain the prevailing themeCurrent market expectations, particularly in the futures market, suggest that the Federal Reserve's current cycle of interest rate reductions will extend through the second half of 2025, with an anticipated three cuts totaling 75 basis pointsIn other words, the U.Sis still firmly within a cycle of significant interest rate cutsThe labor market, although cooling somewhat, remains robust overall, with key indicators showing little volatilityThe unemployment rate has hovered around 4.1% in recent months, and year-on-year wage growth is around 4%, surpassing the pre-pandemic range of 3% to 3.5%. Additionally, the increase in the value of primary assets—real estate and stocks—has had a marked wealth effect, suggesting that consumer spending is likely to hold steady. On a micro level, the basic strategy of expansive fiscal policy for the U.S
in 2025 has begun to crystallize in market expectationsCoupled with liquidity improvement during the interest-cutting cycle, corporate earnings in the stock market are set to see further enhancement.
Market sentiment regarding U.Sequities in 2025 is comparatively optimisticAccording to data from the London Stock Exchange Group (LSEG Smart Estimate), earnings growth for U.Sstocks is expected to maintain over 10% year-on-year into the third quarter of 2024 and beyond, with projections for fourth-quarter growth in 2025 exceeding 15%. Moreover, revenue growth prospects are also relatively bright, with anticipated growth rates of around 5% and 6% in the first and second halves of 2025, respectivelyBloomberg consensus estimates indicate that the profit growth and revenue expectations for the S&P 500 in 2025 will likely be revised up to 14.0% and 6.1%, respectively.
In looking ahead, compared to 2024, the uncertainties surrounding macro factors have significantly diminished
However, there remain uncertainties regarding inflation and the trajectory of interest rate cuts, along with the unclear strength and timing of new government policiesThe interplay of these factors may bring about some short-term volatility in the stock market. Considering the current market expectations of three rate cuts over the upcoming six to eight Federal Open Market Committee meetings, it is evident that there is significant uncertainty regarding the path of interest ratesThis aligns with the Federal Reserve's methodical approach in making interest rate decisionsEach instance of interest rate cut speculation can potentially disrupt the stock marketAdditionally, while the broad direction of the expansive fiscal policy in the 2.0 era seems established, the challenge lies in sifting through the proposed policy frameworks for actual implementation
The actual operational complexities and the sequence of policy introduction may have a significant impact on market dynamics.
Nevertheless, the future policy landscape is not without clues, as we navigate the concept of "political correctness." About two weeks post-election, the new cabinet has been finalizedThe appointments reflect a high degree of consistency with previous policy stances, suggesting that in certain instances, political correctness can take precedence over mere experience, as seen with the appointment of Secretary of Defense Peter Hegseth, formerly a host on Fox NewsConsidering the previous regime's rapid turnover of officials during its early stages and the Republicans' predominant control of both the Senate and House, the core policy initiatives of the 2.0 era are expected to unfold with relative smoothness.
Given the current macroeconomic environment in the U.S
and the historical high valuation of the stock market, we foresee a suitable opening of profit margins for U.Sequities in 2025. The year will likely center around two lines of thought: the "Magnificent 7 plus small caps" as two main themes, and "financials plus energy" as secondary themes.
Within the primary thematic framework, leading technology firms still hold substantial investment valueMoreover, those American small-cap stocks benefiting from a combination of "tax cuts, interest rate reductions, and a return of manufacturing" are expected to see marginally improved investment prospectsIn particular, the concept of artificial intelligence (AI) is not only a core rationale behind the pricing of leading U.Stech firms but also an important bellwether of the broader U.Seconomic outlookWhile the valuations of the seven leading technology companies have reached considerable heights, correlating high valuations with stock price increases is not contradictory
By the end of November 2024, the Magnificent 7 had contributed 35% to the S&P 500's overall gain, propelling the index to a 26.5% increaseFurthermore, futures market data shows that non-commercial long positions in the Nasdaq 100 index have reached 66,681 contracts, representing a relative high since 2021. On the other hand, considering the stance of tax cuts within the policy framework and the continuing interest cut cycle, the profit potential for domestic small businesses in the U.Sis anticipated to undergo further revisions, indicating synchronized improvements at both ends of the financial equation—with small-cap indices like the Russell 2000 indicating enhanced investment value.
In the secondary thematic realm, the notion of relaxing regulations across certain industries emerges not out of prioritization but rather due to the complex legal frameworks required to implement such regulatory changes within the U.S
political systemThese complexities include public announcements, soliciting opinions, reviews, and moreRegulatory relaxation can lead to significant profit growth in relevant sectors without adding fiscal burdens, compelling both the Republican and Democratic parties to engage in detailed policy negotiations, which may extend the timeline for implementing these changesTraditionally, the Republican Party has prioritized relaxation of economic regulations in the political arena, and the adjustment of environmental and energy law frameworks represents a key area of focus during the initial termThis means investors should consider positioning themselves within the "financials plus energy" sectors as these policy dynamics evolve.
It is important to highlight that extreme trade protectionism and the risks of re-inflation could still pose significant challenges to the U.S
economy and stock marketThe U.Sgovernment's implementation of tariffs on a global scale indisputably disrupts the established global supply chains, leading to reverberations not only for economies and businesses outside the U.Sbut also for the U.SitselfFurthermore, as affirmed by Musk, a key figure of government efficiency, proposals to eliminate 77% of government departments while cutting $2 trillion in spending could also significantly upheave normal economic operationsThe combination of extreme trade protectionism and expansive fiscal policies engenders an increased risk of domestic re-inflationIn the short term, it seems likely that the U.Sstock market will operate within an optimistic environment guided by solid economic fundamentals, but vigilance is required to mitigate potential negative impacts stemming from policy shifts and the re-inflationary pressures facing the U.Seconomy.