These views are always made in the context of a well-diversified portfolio and are not meant to be a recommendation to buy into or sell out of a particular area of the market. These views can and will change as new information becomes available, and we will periodically update this brief to keep you informed of changes.

Looking back at 2024 predictions, all three predictions were wrong.

The rest of the market will catch up to the Magnificent 7. Wrong.

There’s folly in trying to nail down a moving target and that’s what stock prices are. They’re perpetually in motion up or down. There was a stretch where small and midcap had outperformed the Magnificent 7, a sign that the rally was broadening beyond those seven names.

Trump’s win is seen as more business friendly. Looser regulations should help smaller companies. On the other hand, there’s expectations of higher economic growth compared to Biden’s term, which is setting the table for higher rates for longer. If the economy overheats, the Fed will need to tamp it down by raising rates. This could put downward pressure on smaller companies that tend to borrow more. The biggest cash piles are owned by the Magnificent 7.

The Magnificent 7 CEOs have mixed relationships with Trump. Elon Musk undoubtably has Trump’s ear and will look to influence policy. Mark Zuckerburg has met the incoming president to smooth over their past conflicts. Facebook removed Trump from their platform in response to January 6th. Tim Cook met with Trump in 2018 after announcing tariffs. Apple has found exemptions for their products, which are mostly produced in China.

The Fed will not cut rates. Wrong, wrong, wrong.

The Fed cut rates four times in 2024, starting with an unprecedented double cut of 0.5% in September. We’ve seen two rate cuts before but they were in response to a recession. To be clear, we aren’t in recession now or nowhere near one. Feelings aside, the data doesn’t support how Americans feel about the economy.

The job market has slowed, and the Fed wanted to get ahead of further job shrinkage, which could lead to job losses. The number of available jobs has shrunk from 2023 highs but we argue that the job market was in an unhealthy place. Jobs were too plentiful, and workers often quit for greener pastures.

At its height, the quits rate jumped to nearly 25% higher than the prepandemic level. Fewer people are quitting now because the number of job openings has come down.

Fast forward to 2025, it looks like the Fed cuts last September are premature. The bond market has been building the assumption that rates will stay higher for longer, implying zero cuts in 2025. This is all in response to the strengthening labor market and the potential for higher inflation.

The dollar will weaken. Wrong.

A persistently strong dollar isn’t a good thing. A strong dollar makes US travelers vacationing abroad feel like they are kings and buying imported goods should feel cheaper (as long as you’re not paying a tariff). But the opposite is true for foreign buyers. If it’s more expensive to buy a Ford abroad, consumers will buy a different brand where their home currency will go further. Travelers vacationing in the US will find it prohibitively more expensive.  

There’s talk about the BRICS (Brazil, Russia, India, and China) countries combining their powers to make a currency to knock the dollar off its pedestal as the world’s reserve currency. Rumors of the dollar’s demise were overblown. If you pull from different piles of trash, all you get is one big pile of trash. Those BRICS countries experience more political and economic instability than the US. As messy as the US is at times, it’s the cleanest shirt in a dirty pile of laundry.

2025 Predictions Sure to be Wrong

We don’t feel strongly enough about any of the below topics to dramatically shift towards or away from any investment. A well-diversified portfolio can help shield wrong bets.

Clean Energy Will Beat Dirty Energy

Repeating the relative success during the first Trump presidency, clean energy will lap old traditional energy. We’re going to compare ICLN (Clean energy ETF) with XLE (Energy ETF).

Clean energy was up nearly 308% while traditional energy was -29% during Trump’s first four years.

Consumers Will Not Notice Tariffs

Economists will argue that tariffs are a tax and discourage free trade. They’re correct for the most part. In the real world, tariffs are easily avoided if you funnel through trade friendly countries like Singapore and Vietnam. Companies who produce goods in China will ship to Vietnam with the final destination being the US.

If we manage to tariff every single import from every single country, then we’ll see a rise in price levels. One of two things will happen, people will pay higher prices or trade down.

We’ll use Google search trends to track this. In addition, the Personal Consumption Expenditures (PCE) index will reflect where people are spending or trading down. PCE is the index that the Fed focuses on for their rate decisions.

US Debt Grows but No One Will Care

The debt levels are unsustainable, and everyone knows it. Do they care? We don’t think so. There’s a prevailing narrative out there that Republicans are fiscally more responsible than Democrats. Both parties are responsible for $36 trillion in US debt.

Congress, while majority Republican, is still dysfunctional with a range of ideologies within the party. There is no consensus majority which means nothing meaningful will get passed. There’s also a heightened possibility of multiple government shutdowns.

People will ignore the political noise, which we’ll track Google search trends throughout the year.

The S&P500 Will Experience 10 New All-time Highs

Forecasting that the S&P500 will hit at least 10 all-time highs seems over optimistic. However, it is a prediction that is historically below the average of 16 new highs per year dating back to 1950. The stock market producing new highs is a common occurrence because the economy is continually expanding.

Heading into 2025, the expectations for interest rates will drive market movement. The Fed came out after its December meeting that their original forecast of 4 more cuts has been revised down to 2.

That’s probably the only known impediment for markets to charge higher. Yes, something unforeseen will creep up. While the US government barely functions, it’s not something that figures to be a risk to a positive market year.

Another tact we’re taking here is that 2025 should be more volatile than 2024. Using the VIX (volatility index), the market was abnormally calm. Yes, there were two bouts of higher volatility but that still doesn’t touch a normal year. The VIX averaged 15.6 last year while it has averaged 18.3 over the past 10 years, including 2024.

Volatility is normal.

Unemployment Will Stay Below 4.5%

This is more a demographic forecast. The labor pool will continue to shrink at the same pace or faster than job erosion (that’s the number of jobs eliminated or job openings being closed).

The latest jobs report showed unemployment dropping from 4.3% to 4.1%. A healthy labor market has an unemployment rate of 5%.

Housing Affordability Will Worsen

Not since 2007 has the housing market affordability been this low. The chart below shows whether a median income household makes enough to afford a median priced home. Anything below 100 is a sign that most households cannot afford the average home price.

To say housing affordability will worsen says a lot about the state of the housing market. The Housing Affordability index is at multidecade lows and it’s difficult for an index like this to drop even further. This is more of an argument that wage gains won’t keep up with housing price gains.

Not since the 80s has housing affordability been this low and the common thread is higher mortgage rates. The big difference was that housing prices in the 80s were much lower compared to average annual salaries of the time. Home prices now will likely stay put because housing supply is dreadfully low.

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The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

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Past performance shown is not indicative of future results, which could differ substantially.

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