The clock has turned, and a new year begins so let’s dig in and look at what this year might bring.

First, it’s important to understand the last few years and why the economy and markets have been good despite the recession forecast. Then we will look forward into 2025, what is expected, and what indicators we believe are important to watch.

A look back:

In previous Market Updates we discussed the bear market of 2022 and the forecasted 2023 Recession. The bear market of 2022 brought much anxiety about an imminent recession, as reflected by the 25.4% drop in the S&P 500 and 33% in the Nasdaq during that year. The recession fears also caused the S&P 500 forward P/E (price-to-earnings) valuation to drop from 21.7 at the start of 2022 to 15.3 by October 12, 2022.

This valuation multiple typically reflects the Investors’ willingness to buy and sell at particular price levels. The average forward P/E for the S&P 500 is 15.8, and historically a bear market bottoms out after the forward P/E drops well below the average. However, from the low of 15.3 on October 12, 2022, the forward P/E rebounded impressively to 22.3 by November 2024, shown in the chart below. This 15.5% increase in the forward EPS resulted in a bull market.

The problem is that sometimes, overly optimistic investors bid prices too high relative to the reasonable potential for future earnings.

The liquidity injected into our system enabled all that buying in 2023 and 2024.

Liquidity is an important factor that historically moves markets, and it has been massively bullish the last two years. This is because the government injected over $2 trillion of “sterilized money” into the system. This has been the driving force for growth in the markets and the economy. Many economists believe we are coming to the end of the liquidity injection into the U.S. system. When liquidity in the system turns, the exit of liquidity typically moves markets the opposite way.

A look forward:

Tim Hartford recently wrote in the Financial Times: “Thinking seriously about the future can be a worthwhile exercise, not because the future is knowable but because the process is likely to make us wiser.”

The future is impossible to predict. Some forecasts are right, and some of them are wrong, but they help us think about what we will do if it happens. This prepares us to act more wisely when/if the forecast comes true.

The S&P 500 Index is trading at one of the most excessive valuations of the last 140 years. Many well-known economists believe asset prices are ahead of valuation, increasing the risk of a correction in the US Equity market. Mark Zandi, the chief economist of Moody's Analytics says the stock market's record-breaking bull run could end up seeing a sharp reversal. While no one can predict the future, we can use history and indicators to gauge the economy and the stock market.

A broad list of economic indicators we follow show low probability of a U.S. Recession:

Credit conditions are tightening but still favorable,
Inflation pressure is low.
Employment trends are favorable,
U.S. Economy is in moderate growth; GDP has been running better than expected at 3%.
Consumer spending is holding up.
US corporate earnings are expected to grow 15%.

There are some historical indicators still showing a recession risk, however, the Fed cutting rates reduces this risk and increases the odds of a longer expansion. Investors will pay a higher price for a stock the longer they believe the economic expansion will last. The rapid rise in the valuation multiple this last year reflected investors’ increasing confidence that the economy and earnings would continue to grow.

The challenges are:

Setbacks caused by reflation frustration,
Geological events and policy uncertainty.
The U.S. Equity Market high valuations could make it vulnerable to corrections with setback risks.
The Global economy is weak and global liquidity is decreasing.
The Trump tariffs could have a negative impact on the economy.

The Tariffs Trump is considering could have serval outcomes good and bad. The chart below by David Bahnsen is a good illustration of what results the economy could experience:

Key Stock Market Drivers to watch:

Inflation trends
Future Fed policy moves.
Consumer spending.
M2 money supply movement
Corporate earnings and stock valuations
Employment

^{Source: David Bahnsen}

The year 2025 will not be boring. A low recession probability and a pro-growth Trump administration suggest friendly markets. Many believe the U.S. economy will stay stable through 2025, but the next year or two after could be rough. The indicators and research we use help us navigate through the unknown, find opportunities, and determine investment risk versus reward.

Everyone defines success differently. Your financial journey is unique, and so are your needs. We proactively help you stay disciplined and focused with your financial and investments goals so you can achieve success. It’s important that you visit with your S&S Wealth Management Adviser Representative at least annually to review your personal and financial situation, your investment objectives and evaluate your accounts so modifications can be made if necessary.

The S&S Wealth Management Team is Proactive, Watchful, and acts as a Guardian of your financial success. Thank you for your trust and business!

^{Let's Connect}Reach out to us today to embark on your financial journey with confidence and expertise

Complimentary Financial Consultation

Market Update January 2025