A New Year’s Gift: My Market Outlook For 2025
Editor’s Note: The TradeSmith offices will be closed for an extended year-end period beginning Tuesday, Dec. 24, and our regular hours will resume on Thursday, Jan. 2, 2025. Our Customer Service team will be unavailable by phone during this period, but can be reached by email only on Dec. 26, 27, 30, and 31. Happy Holidays!
Well, that’s a wrap on 2024 – there are just a few hours to go before we ring in the New Year. And as we look back, it was a phenomenal year for most investors.
The S&P 500 Index soared again, rising by over 25% – following a double-digit gain of 24% in 2023. Commodities had their moment, with crude oil and especially gold delivering solid gains in 2024. And even cryptocurrency investors got in on the action, with Bitcoin (BTC/USD) trading above $100,000 for the very first time at the start of December.
So, after a year of strong performance, what does the New Year have in store for investors? For our last Inside TradeSmith column of the year, I thought I’d walk you through what to expect…
And as an extra holiday gift, I’ve recorded a video to share my thoughts – for those of you busy with last-minute party prep. Check it out below:
Click HERE to Watch (Length: 03:47)
But that’s not all, folks: Read on for more details… and a little New Year’s hint at one of the new developments TradeSmith has in store as we enter January.
A Winning Stock Market Style to Consider in 2025
Here’s the good news: history shows that 2025 is already looking bright.
Historically, following two consecutive years of 20%+ gains like we saw in 2023 and 2024, the S&P 500 tends to ‘three-peat’ – with the index booking further gains during the third year 75% of the time.
But, you may want to temper your expectations: Typically, the S&P 500’s third-year returns, after consecutive 20%+ performance years, are a bit more modest – gaining an average of just 12% since 1950.
Another key factor to consider is the current level of stock market valuations, which could slow down the S&P’s winning streak if it continues through the New Year:
The S&P 500 kicked off 2024 with a price-to-earnings (P/E) ratio near 20 times its trailing earnings – but ended the year at a P/E ratio of 28X earnings – significantly higher than the long-term average of about 18X. That’s pricey.
Driving much of this valuation surge were the “Magnificent 7”, that oh-so-famous group of seven mega-cap stocks that gained over 40% this year.
Without them, the rest of the S&P 500 would be up just 15%!
But while these seven powerhouse stocks – and many in the S&P 500 – are expensive, other areas of the stock market are relatively cheap today. And I expect that these bargain stocks could outperform the S&P 500 by a wide margin in 2025.
Specifically, there is a 25%-Off sale for small-cap stocks on right now, as you can see below:
The S&P Small Cap 600 Index is trading at a 25% discount to its large-cap counterpart – a valuation gap rarely seen outside of the 2020 pandemic panic.
The last time small caps were this cheap relative to the S&P 500 was in 2002. And following that period, small-cap stocks went on to outperform the S&P 500 for the next four years in a row.
But it’s not just about valuation – small caps have another big factor on their side: growth.
As you can see in the graph above, small-cap profits are expected to grow by 41% in 2025, compared to just 15% in earnings growth forecasted for the S&P 500. That’s another big advantage for cheap small-cap stocks over expensive large caps as we look to the year ahead.
So, that’s one investment style that I’ll be squarely focused on in 2025.
As noted in the beginning of this article, the TradeSmith offices will be closed for one more day as we finish ringing in the new year, but we’ll be back to regular operating hours on Thursday, Jan. 2. We hope you enjoy the rest of the winter holidays, and we’ll see you again soon.
Happy New Year – and good investing.
Mike Burnick
Senior Analyst, TradeSmith
P.S. As we step into 2025, the small-cap sector may be positioned for a comeback, trading at 25% discount compared to those large-caps. And when the sector is expected to grow 41% over the next year, there’s plenty of potential for serious profits.
But while these “bargain” stocks capture the market’s attention, optimizing your investment approach can unlock even greater potential.
And when it’s time to optimize, that’s where innovative trading strategies come into play. TradeSmith’s CEO, Keith Kaplan, has developed a groundbreaking tool designed to align your portfolio with the market’s natural rhythms. This system pinpoints seasonally bullish periods with remarkable accuracy – and he’s developed a new trading strategy that puts these periods to good use.
Back-tested over 18 years, it delivered 857% growth – more than double the S&P 500’s performance over the same period.
In just over a week, Keith will debut this impressive new strategy to investors through an exclusive webinar. He’ll demonstrate how this tool works, and show you how the latest version of the Trade Cycles Seasonality tool can help you unlock a new approach to the market.
And he’s excited enough that he’s providing access to the seasonality tool right now, free of charge – giving you the opportunity to test it yourself before the big event. Mark your calendar for Wednesday, Jan. 8, at 10 a.m. Eastern, because you won’t want to miss this.