Current Market Outlook
Posted on January 13, 2025
The year 2024 was one for the record books, as the S&P 500 surpassed the 6,000 milestone, and logged two consecutive years of greater than 20% total return. The index has advanced 70% from the October 2022 lows, and an equally impressive 200% over the last decade. This performance is a remarkable feat, however, as we chart the path forward, we find ourselves at a crossroads.
The S&P is now trading at a valuation of 22 times next year’s expected earnings—well above its historical average of 16x, and never more expensive on a relative basis to developed markets such as Europe. This begs the question; how much is too much to pay for growth? In the post-COVID era, the U.S. has been the developed world’s only source of durable economic growth, and over the past 2 years, the epicenter of artificial intelligence (AI) leadership. The ensuing inflow of global investment dollars has spawned a “crowded trade” that could be rapidly upended on the most minor disappointment in these growth expectations.
Indeed, a substantial component of the higher expected growth for U.S. firms is predicated on a robust return-on-investment on the unprecedented capital expenditure (capex) cycle that unofficially began in late 2022, surrounding the OpenAI launch. But investors may have limited patience on long-dated capex cycles of this scale that do not manifest in near-term profits, especially in the tech monopolies making the bulk of the investments—Alphabet, Amazon, Meta, and Microsoft. In such a scenario, the U.S.’s historically high absolute and relative valuations could be an accelerant to repricing down to more modest growth expectations.
It is against this challenging fundamental backdrop that it is important to address some of the political realities that may also arise in 2025, relative to the exuberance of the post-election period. When Donald Trump first ascended to the Presidency in 2017, the Republican majority held a 47-seat advantage in the House of Representatives. Owing to his recent appointments, the Republican post-election lead of 220-215 has dwindled to 217-215, meaning that until special elections later in 2025, not a single defection can occur in the ranks without triggering a measure’s defeat, as the House holds no provisions for tie-breaking. The Senate is slightly more in Republican control at 53-47, but well shy of the filibuster-proof 60-vote threshold, thus requiring bipartisanship for most laws, save the one or two bills that can take the reconciliation path under very stringent conditions.
Combined with the generally glacial pace of the legislative process, this is a sobering counterpoint to the market’s hopes for rapid and wholesale changes to Federal laws and the government’s size and scope. On the Executive front of course, there are many levers that we expect will be pulled, especially in the areas of trade, immigration, and deregulation. It is the latter factor that is largely the driver of the renewed “animal spirits” in markets, as the return of a pro-business administration could potentially unfreeze pools of available capital for M&A and other investment. But the proposed steps on trade and immigration have the potential of being geopolitically disruptive and importantly, inflationary. Given the currently stalled progress on lowering inflation, this would be unwelcome news to both equities and bonds.
At the Trust Company, we believe in U.S. exceptionalism—the enduring strength of our economy, institutions, markets, corporations, and technology—and it has long-guided our approach and allocations. But given the lofty expectations underlying prices and sentiment, we remain singularly focused and increasingly selective in identifying more fairly-valued growth to achieve clients’ investment goals over the cycle.
Kristian R. Jhamb, MBA, CFA
Chief Investment Officer
Logan S. Webb
CFA, CFP®
Senior Portfolio Manager
My Account