Stock Market Risks and Opportunities

A Deep Dive into Equities in 2024 and the Road Ahead for Markets

The stock market in 2024 delivered a performance for the history books, with S&P 500 concluding 2024 with an exceptional 23 percent gain, following an equally astounding 24 percent rise in 2023, presenting significant opportunities for investors with a low side of risk. These back-to-back performances marked the strongest consecutive years since the late 1990s – a reminder of how Wall Street’s energy can produce dazzling highs when optimism reigns supreme and risk remains low. The bull run, which began in October 2022, saw the S&P 500 climb over 40 percent from its low point, fueled by a potent cocktail of factors: interest rate cuts, a tech-fueled AI mania, and the triumphant return of Donald Trump to the White House. The benchmark index’s consistent climb since October 2022 underscores Wall Street’s unrelenting optimism, even amid global uncertainties. As we look toward 2025, investors are once again navigating a landscape of international risks and opportunities that demand careful consideration.

To paraphrase the opening line of Dickens’ A Tale of Two Cities, “It was the best of times…and also a bit terrifying.” While investors celebrated record highs, underneath the glittering surface, anxiety about international risks simmered. Every boom carries the seeds of its own bust, and 2024 was no exception. But before diving into the risks lurking beneath the market’s glowing facade, let’s first review what made this year’s equity rally possible.

The Making of a Modern Bull Market

In late 2023, things looked full of risk. The S&P 500 was down 15 percent from its early 2022 peak, battered by rising interest rates and fears of economic slowdown. The chart of the index resembled a jagged mountain range, with investors lurching between panic and cautious optimism. Inflation was enemy number one, and the Federal Reserve seemed unwilling to loosen its iron grip on monetary policy.

Then came the shift in the market’s risk profile. Inflation, which had haunted markets since 2022, began to ease. By mid-2024, the Fed’s preferred inflation measure—core Personal Consumption Expenditures (PCE) fell to 2.3 percent, comfortably near the US central bank’s target. The US Federal Reserve responded with its first rate cut in September, followed by two more by year’s end. Suddenly, the economic backdrop transformed from a murky slog to a landscape bathed in golden light.

“The United States is well-positioned to continue driving global economic growth, supported by an expanding business cycle, a resilient labor market, increasing investment in AI-related technologies, and strong capital markets bolstered by active dealmaking. In contrast, Europe grapples with ongoing structural issues, while emerging markets face the challenges of prolonged higher interest rates, a strong US dollar, and mounting trade policy pressures.”

Dominic Bowen, Host of The International Risk Podcast

Corporate America seized the moment. Productivity growth surged—output per hour climbed 2.5 percent, a stark improvement over the lethargic 1.5 percent average from 2005 to 2019. Tech companies, already riding high, strapped rockets to their portfolios. The “Magnificent Seven”—Nvidia, Apple, Microsoft, Meta, Amazon, Tesla, and Alphabet – led the charge. Nvidia’s market cap alone ballooned by $2.5 trillion, dwarfing even Alphabet. The AI boom became the stock market’s fairy dust, sprinkling gains across sectors and giving investors a new opportunities to explore.

Add Donald Trump’s re-election into the mix, promising tax cuts and deregulation, and you had the perfect storm for investor confidence in the bull market. The market had everything it wanted: disinflation, a roaring tech sector, and accommodative monetary policy. By summer 2024, the S&P 500 hit new all-time highs.

But as the champagne flowed on Wall Street, whispers of risks began to surface.

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Cracks Beneath the Stock Market Surface and Emergence of Risk

The latter half of 2024 brought subtle – but important – signs of emerging risk in the market. Labour market indicators began flashing yellow. Job growth softened, and delinquencies in commercial real estate and credit card loans reached post-2008 highs. For a market that had priced in perfection, any hint of trouble sent shockwaves.

Valuations became another visible risk for analysts. By year’s end, the S&P 500’s price-to-earnings ratio was at cyclically high levels, leaving little room for error. Investors, once unfazed by middling economic reports, suddenly became much more concerned about the possible risks. A dip in consumer confidence or a weak manufacturing index could send stocks bearishly low.

Even the AI frenzy, which had powered much of the rally, started to show the downside of risk. Nvidia and its tech peers swung, erasing 10 percent of the S&P 500’s gains in one breath and clawing it back in the next. Confidence in AI’s transformative potential remained high, but the market’s love affair with tech began to feel complicated and demonstrated signs of visible risk.

Entering 2025: The Tightrope Ahead for Managing Risk

As we look to 2025, Wall Street’s optimism remains intact, but the road ahead is anything but risk free. Corporate earnings are expected to carry much of the burden. While the “Magnificent Seven” posted staggering profits in 2024, the rest of the market – sometimes referred to as the “S&P 493” – saw earnings shrink. Analysts at JPMorgan forecast a turnaround, predicting double-digit earnings growth in 2025. But clearly risks remain.

“2025 is one that sees global growth still remaining strong. U.S. exceptionalism is expected to bolster the U.S. dollar and buoy U.S. risky assets, but the outlook appears more mixed for Treasuries. J.P. Morgan Research is broadly constructive on credit, anticipating modest changes in high-grade spreads, but remains cautious on EM fixed income. In addition, the outlook for U.S. equities and gold is bullish.”

JP Morgan 2025 Outlook, released 19 December 2024

Meanwhile, tech giants’ profit growth, though still impressive, is expected to narrow. Goldman Sachs forecasts the slimmest margin of outperformance for these companies in seven years. Investors who piled into AI stocks with starry-eyed optimism may find the glow dimming. Additionally, consumer discretionary stocks, often sensitive to changes in interest rates, could also face downward pressure if the US Federal Reserve slows its rate-cutting trajectory, which is now seen as very likely in 2025. Moreover, industries like healthcare and renewable energy, which benefit from regulatory incentives, might see volatility if the incoming administration revises tax or subsidy policies.

And then there’s the wildcard: Donald Trump. His “historic mandate” to overhaul trade policy, taxes, and regulation is as much a source of excitement as it is uncertainty. Trump’s unpredictability – a feature, not a bug – makes it difficult for analysts to model economic outcomes. Charles Schwab’s 2025 outlook put it bluntly: “The fluidity of Trump’s policy positions and absence of consistent frameworks make forecasting an exercise in futility.” With the US economy expanding and corporate earnings on the rise, coupled with relatively easing financial conditions, analysts anticipate a surge in M&A activity in 2025. This wave of mergers and acquisitions could be further supported by the prospect of reduced regulatory oversight in select industries under the incoming Republican administration.

Lessons from 2024’s Stock Market Risks and Opportunities

What can investors learn from the past year’s highs and lows? First, it pays to be prepared for volatility. The market’s relentless climb in 2024 was punctuated by stomach-churning drops, particularly in the tech sector. Those who stayed the course were richly rewarded. But as valuations stretch further, the margin for error narrows.

Finally, keep an eye on macroeconomic trends. Inflation, labor market data, and Federal Reserve policy moves will continue to dominate headlines and drive market sentiment in 2025. Investors who stay informed will be better equipped to navigate the twists and turns.

Wall Street loves a good story, and the narrative heading into 2025 is one of cautious optimism. The Nasdaq Composite, which gained 33 percent in 2024, still has room to run if historical patterns hold. In years following gains of 30 percent or more, the index has risen an average of 19 percent, according to data dating back to 1972.

The AI revolution, too, is far from over. PricewaterhouseCoopers estimates that generative AI could contribute $15.7 trillion to the global economy by 2030. For investors willing to accept the risk and volatility, tech remains a compelling and risky opportunity. Elevated valuations and political uncertainty mean that 2025 could be higher risk than the past two years. Historically high valuations tend to amplify market drawdowns during periods of economic shock.

As we enter 2025, the stock market stands at a crossroads. On one hand, the economic expansion, disinflation, and technological breakthroughs that fueled 2024’s rally are expected to continue into 2025. On the other, stretched valuations, a cooling labor market, and unpredictable political dynamics introduce significant international risks that should be monitored.

Investors would do well to remember the lessons of 2024: stay diversified, keep an eye on macro trends, and be prepared for volatility. The stock market’s journey is rarely a straight line, and the peaks of one year often lead to the valleys of the next. But for those who navigate the twists and turns with care, the rewards can be extraordinary. Staying close to your strategic advisors and monitoring the risk environment is a good play in 2025!

Stay tuned to The International Risk Podcast for more insights and expert analysis as we unpack the risks and opportunities shaping the global financial landscape.