Another year of investing is wrapping up, and the Christmas Season is almost upon us. To the new readers out there... "Welcome". For the readers who've been receiving these pieces for the last 5+ years or so, you may know that one of the things I like to do this time every year is compare "the market's" actual performance against the predictions of the major forecasters. This year was actually better than most, but I highlight it simply because many investors react in January when they see these predictions AND many times the predictions aren't worth the weight of the digital paper they're printed on.
Forecast (January 2025 Predictions vs Reality)
Firm | Prediction | Reality Check |
Goldman Sachs | S&P 500 at 6,500 | We’re already at 6,847. Congrats, you’re underweight optimism. |
Morgan Stanley | 5–10% return, warned about >22x P/E | Market said “Hold my AI chip” and delivered 16%+. |
RBC | Target 6,600 | Reality: Currently above target with weeks to spare. |
UBS | Base case 6,600, later trimmed to 6,000 | Market laughed and kept climbing. |
Wells Fargo | Range 6,500–6,700 | Reality: Currently above target with weeks to spare. |
Lesson: Forecasting is like weather prediction in the early 1900s — fun, but don’t bet your portfolio on it.
Here are my main take-aways when I look backward at 2025
- Performance thus far
The S&P 500 is up 16.4% YTD, sitting near 6,878 as I type these words. The Nasdaq? Up 21.5%—because apparently AI still had room to go. But before you pop champagne, let’s talk about what’s really happening: P/E ratios are climbing, and the market’s leadership is narrow. - Valuations are stretching but not in the way most investors think
If you look at the entire S&P 500 you might be inclined to think the market is possibly over-valued. I mean price to earnings multiples are around 23x for the S&P 500 and the 10-year average is closer to 20x. This simply means the current average price to purchase a stock in the S&P500 is higher for each dollar of earnings per share. Here comes the interesting part though....This figure is very skewed due to what is called the "Magnificent 7". The 7 companies that make up the "Mag 7" account for 35% of the total value of the index. The other 493 companies in the index, which account for the remaining 65%, are actually priced very close to their historical average.
Why it matters: The Mag 7 now make up 35% of the index’s market cap. That’s not diversification, that’s seven stocks in a trench coat pretending to be an index. Opportunities to purchase companies that aren't historically overvalued exist and are abundant. - Fed’s December Decision: A Hawkish Cut
On December 10, the Fed cut rates by 25 bps to 3.50–3.75%. Powell called it a “hawkish cut”, which is basically Fed-speak for “We’ll help you, but don’t get too comfortable.”
They also announced $40B/month Treasury bill purchases—because nothing says “technical liquidity management” like quietly pumping cash into the system.
Why it matters: We've seen this play over the last few years. Stocks historically like an environment where interest rates are being lowered. There's a multitude of reasons, cheaper borrowing costs for businesses, increased consumer spending from higher household free cash flow due to cheaper debt payments, and my favorite reason...simple supply and demand. When CDs and savings rates go down investors begin to look at finding other productive uses with their cash and then money goes into the stock market. Cash is not king in the long run. We'll see how this plays out because, unlike 2020-2022, inflation is still lurking as Powell reminded everyone.
Investor Takeaways
- Valuation risk is complicated, especially when seven stocks are wearing the cape.
- Index ≠ diversification when Mag 7 drives the bus. Countless investors do not understand that passively many managed indexes are not as diversified as they think.
- Fed cuts help, but don’t assume endless tailwinds. Powell’s still watching inflation like a hawk at a mouse convention.
We hope everyone has a fantastic holiday season.
Until next time.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
All indices are unmanaged and may not be invested into directly. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All investing involves risk, including possible loss of principal.
