Success is achieved and maintained by those who try and keep trying

“Success is achieved and maintained by those who try and keep trying”

–W Clement Stone

As we enter the New Year we have a cautious market outlook, and we will attempt to summarize the main factors influencing our thinking in this note. This does not mean the stock market will decline in 2025 (our crystal ball isn’t that clear), just that there are challenges to consider. On the positive side, GDP is likely to exceed prior estimates in the final quarter of 2024 and continue expanding by 2.0% in 2025. Unemployment of around 4% is stable. Earnings growth for companies comprising the S&P 500 is forecast to grow 15% in 2025 vs. 7% in 2024, and the incoming administration is likely to lessen regulatory burdens.

Factors weighing on the side of caution are present as well. At 23 times forward earnings the market valuation leaves little room for error. The Federal Reserve began lowering interest rates in 2024 but the need to continue cutting rates is less apparent given the strong economy. Instead, we think the Fed may turn its attention toward combatting inflation.

Potential tariffs and wage inflation are two inflationary factors to monitor.

Finally, we are wary of the growing Federal debt which is currently $35 trillion. In Fiscal 2024 the US government collected $5 trillion in taxes and other revenue and spent $6.9 trillion which increased the debt by $1.9 trillion. Of the amount spent only 14% was on discretionary programs which highlights the challenges ahead in addressing the deficit.
The cost of servicing the Federal debt now exceeds $800 billion per year, and will reach $1 trillion in Fiscal 2025, an amount greater than the US Defense budget. The 10-year treasury yield has risen from 3.8% to 4.6% in the last year, even as the Fed has cut short term rates. Higher long-term rates depress stock valuations so earnings may grow, yet stock prices sit idle if multiples contract. Eventually earnings growth would drive stock prices higher, after stock multiples adjust to higher rates.

To close on a hopeful tone please remember investing is a long-term exercise, and the economy is always evolving. Joe and I have been investing for a collective 65 years and history shows us that owning equities over time provides the best investment return. The companies we own on your behalf are not dependent on external financing to grow so if conditions do get difficult, the management teams of the stocks you own should capitalize on opportunities that arise. Thank you for entrusting us with the management of your money. We look forward to speaking with you in the coming weeks.

Sincerely,

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