Why the Stock Market May Fall Even Further in January

The S&P 500 Index, represented by the SPDR S&P 500 ETF Trust (SPY), is weighted by market capitalization. This structure gives significant influence to its largest holdings—Apple Inc., Microsoft Corp., and Nvidia Corp.—which collectively account for 20.5% of the index. While 2024 has been a strong year for the overall stock market, examining the market’s breadth reveals some interesting insights.

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As of Thursday, the S&P 500 had retreated 2.7% in December. Despite this, the index maintained a robust year-to-date gain of 24.7%. However, the S&P 500 Equal Weight Index, which assigns the same weight to each constituent regardless of size, told a different story. It declined by 7.1% in December and had achieved less than half the return of the cap-weighted S&P 500 for the year. Notably, a third of the stocks within the S&P 500 delivered negative total returns for 2024 through Thursday, underscoring the uneven performance across the index.

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December’s market pullback has been broad-based, with 89% of the S&P 500’s components showing negative returns. This widespread decline coincided with a policy decision by the Federal Open Market Committee (FOMC) on Wednesday to lower the federal funds rate by 25 basis points to a target range of 4.25% to 4.50%. Typically, stock and bond markets react positively to rate cuts due to their stimulative effects on economic activity. However, this time, markets responded with increased volatility, and both stocks and bonds declined. Christine Idzelis offered insights into this unusual reaction, exploring the dynamics behind the market’s disappointment.

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Broader market trends suggest that the extended rally over the past two years may be losing steam. Analyst Michael Brush identified patterns indicating that the bull run could end soon, with January potentially bringing accelerated declines. Adding to this cautious outlook, Vivien Lou Chen examined trading activity in U.S. Treasury bonds, which she argued signals further downward pressure on stocks.

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As the year-end approaches, historical data offers perspective on the stock market’s performance. Over the past 30 years, the S&P 500’s average annual return, including dividends reinvested, has been 10.93%, according to FactSet. At this rate, an investment would double approximately every seven years. For context, the S&P 500 has gained 24.7% in 2024 and 26.3% in 2023, a remarkable rebound following the 18.1% decline in 2022. Since the end of 2021, the index has delivered a cumulative return of 28.9%, highlighting its resilience despite recent fluctuations.

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With two consecutive years of exceptional gains, the current volatility in December raises questions about what to expect in 2025. Mark Hulbert offered a long-term perspective by examining historical performance trends year by year, providing valuable insights for investors as they plan for the future.

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This year’s performance disparity between the cap-weighted S&P 500 and its equal-weighted counterpart illustrates the concentration of gains among a few megacap stocks. While the broader market has struggled, the outsized contributions of Apple, Microsoft, and Nvidia have propelled the overall index to impressive gains. However, the December pullback and the struggles of smaller components within the index suggest caution heading into the new year.

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The FOMC’s rate cut on Wednesday marked another chapter in the Federal Reserve’s efforts to navigate a complex economic environment. While lower interest rates are generally seen as positive for equities and bonds, the market’s response highlighted concerns about lingering inflation, economic uncertainty, and the Fed’s future policy trajectory. These factors combined to create heightened volatility, a theme likely to persist into the early months of 2025.

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For long-term investors, the market’s recent turbulence serves as a reminder of the importance of patience and perspective. While short-term movements can be unsettling, historical data underscores the benefits of staying invested over time. The S&P 500’s average annualized return of nearly 11% demonstrates the compounding power of consistent exposure to equities. Even after a challenging year like 2022, the index’s performance over the past three years reflects its ability to recover and thrive.

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As 2024 concludes, investors are left to grapple with a mixed picture. On one hand, the strong performance of megacap stocks has driven the cap-weighted index to remarkable heights. On the other, the broader market’s struggles and December’s widespread declines signal potential challenges ahead. The interplay between Federal Reserve policy, economic conditions, and market sentiment will likely shape the path of equities in 2025.

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Mark Hulbert’s analysis of historical trends offers a valuable roadmap for navigating the uncertainty. By taking a long-term view and focusing on the market’s overall trajectory rather than short-term fluctuations, investors can position themselves for success in the years ahead. With the S&P 500 poised for a new chapter, 2025 will likely bring fresh opportunities and challenges for market participants.

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