It is Rare for the Stock Market to Score Hat Tricks. Strategists Fear What Lies Ahead

Wall Street had underestimated the strength of the equity market in 2024, a year that delivered impressive gains. As attention shifts to 2025, investors are pondering whether the upward trajectory can persist.

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Michael Cembalest, chairman of market and investment strategy at JPMorgan Asset & Wealth Management, raised this question in his newly published annual outlook. He pointed out the challenge posed by high valuations, which now play an equally significant role as earnings growth in driving market movements. "For investors, there’s little room for error with valuations this high," Cembalest wrote.

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A key concern for Cembalest is the rare performance milestone achieved by the S&P 500. The index posted two consecutive years of over 20% gains—a feat accomplished only ten times since 1871. In 2024, the S&P 500 rose 23.3%, following a 24% gain in 2023. Historical data shows that four consecutive years of double-digit gains after two such robust years have only occurred during the 1990s bull market and the Roaring Twenties.

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Cembalest predicts a more turbulent 2025. “I expect a 10%-15% correction at some point in 2025,” he stated, attributing this to economic interventions by what he refers to as the "Alchemists," a term he uses for the incoming administration of President-elect Donald Trump. He expressed concerns about potential disruptions from the administration's policy agenda, including deregulation, tariffs, tax cuts, cost reductions, and immigration policies.

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Despite these concerns, Cembalest maintains a cautiously optimistic outlook, expecting U.S. equity markets to end 2025 higher than they started. However, he advised investors to prepare for volatility and maintain sufficient liquidity to capitalize on market corrections.

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Cembalest identified the 10-year Treasury note as a key barometer for assessing the impact of the Trump administration's policies. If deregulation and tax cuts outweigh the inflationary pressures of tariffs, labor shortages, and budget deficits, the 10-year yield should stay between 4.5% and 5.0%. Conversely, a sustained rise above 5.0% could signal deeper economic issues.

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Encouragingly, Cembalest noted signs of a "soft landing" for the U.S. economy, a rare scenario in which Federal Reserve rate hikes to combat inflation do not lead to a recession. He highlighted easing labor market conditions and steady growth in consumer and business capital spending, which aligns with an economic growth rate of around 2.5%.

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Deregulation, if executed with a "light touch," could further spur economic growth. Cembalest also pointed to a recovery in venture capital activity, which he believes could sustain positive market sentiment.

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In the broader market, U.S. stocks opened higher, continuing their momentum. Key indices, including the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite, all posted gains. Meanwhile, benchmark Treasury yields edged lower, reflecting easing pressures in bond markets.

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As 2025 unfolds, the interplay of policy decisions, economic indicators, and market sentiment will likely shape the trajectory of equities. Investors will need to remain vigilant, balancing optimism with a readiness to navigate potential turbulence.

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