The Big Picture
A roller coaster ride is an apt reference for a feeling that you have gone everywhere and nowhere all at once.
There is trepidation and/or excitement on the climb followed by fear and/or exhilaration as the car you are riding in starts to accelerate on its stomach-dropping descent over the first hill. Then, there is jubilation and/or pandemonium as the car careens around the track, perhaps throwing you for a loop or two along the way, before screeching to a stop.
In your mind, you have gone everywhere, but in reality, you have gone nowhere. When the roller-coaster ride ends, you are right back to where you started.
A roller-coaster ride may be an apt reference for the feeling of going everywhere and nowhere all at once, yet it might also end up being a metaphor for the stock market, which has had its moments of fear, exhilaration, jubilation, and pandemonium already this year.
And there is more of that to come.
Tough to Stay on Track
With all the twists and turns in early 2025, the market-cap weighted S&P 500 is up 2.3% year-to-date as of this writing while the equal-weighted S&P 500 is up 2.7%. The gains, however, haven't felt convincing. There has been a lot of tossing and turning from one day to the next.
Some days value outperforms growth. Other days growth outperforms value. Some days cyclical sectors outperform countercyclical sectors. Other days countercyclical sectors outperform cyclical sectors. Some days small-cap stocks outperform large-cap stocks. Other days large-cap stocks outperform small-cap stocks.
You get the drift. The main point of the back-and-forth action for investors is that the net change has been positive. Let's hope it stays that way, yet it seems unlikely to be as easy to stay on a positive track as it was in 2024 for a variety of reasons.
- The expectation of multiple rate cuts that prevailed in 2024 has been replaced by a brooding belief that sticky inflation and policy uncertainty will leave the Fed reluctant to cut rates in 2025.
- The multiple expansion throughout 2024 has created valuation angst in 2025, as the market cap-weighted S&P 500 trades at a robust premium to its 10-year average while the ratio of the Wilshire 5000 market cap to nominal GDP is north of 200% (a zone equated as "playing with fire," according to Warren Buffett, whose Berkshire Hathaway continues to sit on a mountain of cash).
- There is talk of tax cuts and deregulation, both of which are exciting possibilities for the stock market, yet that excitement gets tempered by the uncertainty surrounding tariffs and deportation initiatives.
- DOGE has been lauded as a needed effort to cut government spending, but big cuts in government spending are expected to weigh on economic growth.
- There is huge promise in AI applications, yet there are festering questions as to whether the big AI spenders will see a meaningful return on that investment.
- Fourth quarter earnings results have been much better than expected, as discussed last week, yet the first quarter earnings growth estimate has been slashed to 7.6% from 11.6% on December 31, according to FactSet, while the calendar year 2025 growth estimate has been trimmed to 12.1% from 13.3% on December 31. It is a trend in the wrong direction for a market sporting a premium earnings multiple.
- Various reports suggest there could be some dissension in the GOP ranks as the bid to cut taxes runs headlong into a need to cut the deficit, meaning the market's tax cut enthusiasm could get stifled if deficit hawks stand in the way of the president's more aggressive tax cut plans.
- From a short-term perspective, there are conflicting "contrarian indicators," with the AAII's bearish sentiment reading on the high side (40.5% vs 31.0% historical average) and a BofA Securities global fund manager survey indicating cash positions are at their lowest level (3.5%) since 2010.
What It All Means
There are a lot of "big" issues that lack closure. That will keep market participants guessing more than usual with respect to the outlook for the economy, interest rates, and the market itself.
The sticking point for many is that the premium valuation at which the market trades has effectively priced in the continuation of good news happening on all fronts. The allowance for bad news is in one's mind more so than it is in stock prices.
Things aren't lining up perfectly right now, which is why we have seen the tossing and turning to start the year. Those are features of a roller-coaster ride, so keep your seatbelts fastened.
This market needs closure in the data to have a better sense of what is coming around the next turn. Absent that it seems primed to go everywhere and nowhere.
