Stocks Are Rallying Hard as the Economy Shows No Signs of Slowing Down. Is it Going to Last Until 2025?

U.S. stocks have been surging to record highs as 2024 nears its close, buoyed by renewed enthusiasm for the deregulatory policies, tax cuts, and tariff measures tied to President Trump's second term and his “America First” agenda. Investors have embraced the administration's economic proposals, propelling a broad market rally.

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Political Influence on the Markets

The November election, which saw a Republican “red sweep,” reflected public discontent with inflation and economic challenges. Despite inflation creeping higher, it remains within a "goldilocks" range that markets view as manageable. However, inflation and overall economic conditions will remain critical as the Federal Reserve deliberates further rate cuts in 2025. These factors could challenge the bullish outlook for stocks, with Wall Street forecasts anticipating a third consecutive year of significant gains.

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“Investors appreciate the market-friendly tone of deregulation and the certainty of knowing the incoming president,” said Alex Atanasiu, portfolio manager at Glenmede Investment Management. However, he cautioned about potential risks stemming from elevated market expectations and geopolitical uncertainties.

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Risks for Megacap Tech Stocks

A core driver of this year’s market gains has been the dominance of the "Magnificent Seven" technology stocks, led by Nvidia Corp. These stocks now account for an astonishing 31% of the S&P 500’s market capitalization. Optimism around artificial intelligence (AI) has fueled their elevated valuations. However, Atanasiu warns that these same stocks could face headwinds if President Trump moves forward with his proposed tariffs, which could dent revenues for tech giants reliant on global supply chains.

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The concentration of wealth in these stocks also raises concerns. Atanasiu noted that investors often treat megacap tech names like Apple, Amazon, Microsoft, Meta, Tesla, and Alphabet as “risk-free investments,” which could lead to sharp losses if sentiment shifts. “It’s great on the way up, but not on the way down,” he remarked.

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A Broader Market Rally

One of 2024’s biggest surprises has been the market’s resilience. Recession fears that loomed earlier in the year have dissipated, and the Federal Reserve has taken a measured approach to interest rate reductions.

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Initially, the rally was driven almost exclusively by megacap tech stocks, creating a fragile market environment where most stocks lagged behind. However, this changed around midyear when the rally broadened to include a wider array of equities. “Now, it feels like everyone is participating in the parade,” said Kevin Gordon, senior investment strategist at Schwab. This broader participation has helped align the economic narrative with the stock market’s performance.

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Despite this improvement, uncertainties remain regarding Trump’s trade policies. His threats to impose tariffs on goods from Canada and Mexico or implement restrictive immigration policies could reignite volatility. Late-night social media posts announcing sudden policy shifts could further unsettle markets. Gordon cautioned that such unpredictability doesn’t necessarily lead to market declines but could make volatility a more prominent risk factor.

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Trump’s potential immigration restrictions also raise red flags. Limiting labor supply could dampen economic growth and erode business confidence, creating what Gordon described as a “big wet blanket” for sentiment.

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Federal Reserve’s Rate Policy

The Federal Reserve has already cut interest rates by 75 basis points since September, bringing its benchmark range to 4.5%-4.75%. Another 25-basis-point cut is expected in December. However, some experts question the urgency for further rate reductions.

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Charlie Ripley, senior investment strategist at Allianz Investment Management, argued, “Given the strong equity market performance and stable financial conditions, there isn’t a compelling case to aggressively lower rates at this stage.”

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The U.S. economy continues to show strength, with third-quarter gross domestic product (GDP) growing at an annualized 2.8% rate. Jim Baird, chief investment officer at Plante Moran Financial, believes growth could accelerate further in 2025, supporting stock market gains even if it leads to a slower pace of Fed rate cuts.

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Baird noted that a majority of Americans seem satisfied with the election outcome, as evidenced by resilient consumer sentiment and a rising stock market heading into year-end.

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The major U.S. indexes have posted impressive gains in 2024. As of Thanksgiving, the S&P 500 was up 25.8% for the year, the Dow Jones Industrial Average had climbed 18.7%, and the Nasdaq Composite had gained 27%.

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In November alone, the Dow was on track for a 7.1% monthly gain, marking its best performance since October 2022, according to Dow Jones Market Data. This robust finish has reinforced optimism for the market’s momentum heading into the holiday season.

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Conclusion

While deregulation and fiscal policies under Trump’s second term have bolstered investor confidence, risks such as heightened volatility, potential tariffs, and tighter labor markets loom on the horizon. The Federal Reserve’s cautious approach to rate cuts and the broader participation in the market rally provide a strong foundation, but the interplay between political and economic factors will shape the market’s trajectory in 2025. For now, investors remain focused on the year-end rally and the opportunities it presents.

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