We are biased by the stock market’s bullish bias. We tend to be permabulls because bear markets are infrequent and are usually relatively short compared to bull markets, which tend to last for some time. Since January 1978, the S&P 500 is up 66.6-fold.
In that entire 47-year period, there were just six bear markets that lasted only a bit more than one year on average. Bear markets tend to be caused by recessions. There have been only six of them since 1978, lasting just 14 months on average. 
As we’ve previously noted, we regularly follow the growlings of the permabears as an efficient way to assess what could go wrong for the economy and the stock market. Very rarely do we find that they’ve missed all the things that could go wrong, while we frequently find that they’ve mostly ignored an assessment of what could go right. (See our December 23, 2024 QuickTakes titled “Permabulls Versus Permabears.”
The S&P 500 peaked at a record high of 6090.27 on December 6. It ended in 2024 at 5881.63. The index ended the first week of the new year at 5942.47, just below its 50-day moving average.
The Nasdaq peaked last year at a record 20,173.89 on December 16 and bounced off its 50-day moving average last week to close at 19,621.7.
On balance, we expect that the next few weeks could be choppy for the stock market before the S&P 500 and Nasdaq resume climbing to new record highs during the spring.
Here is a list of what could go right in early 2025, followed by a review of what could go wrong:
Q4’s earnings reporting season over the next few weeks might be better than expected. They usually are when the economy is expanding. The analysts’ consensus estimate for Q4 earnings growth is 8.2%. There were typical upside earnings surprises during the previous three earnings seasons. There should be another during the Q4 earnings season. Leading the way should be banks, semiconductors, cloud computing, retailers, and restaurants.
CES 2025 is this week. The Consumer Electronics Show, or “CES” for short, kicks off Monday evening and runs through Friday, January 10. This highly anticipated industry tradeshow features the biggest tech players from across the globe showcasing their latest consumer technology with daily product launches, keynotes, activations, and demos. It will undoubtedly be all about AI. Indeed, Nvidia founder and CEO Jensen Huang will deliver a keynote address Monday at 6:30 p.m. Nvidia produces the GPU chips that power AI.
Nvidia’s stock price is up 12.1% from a recent low of $ 128.91 on December 18 to $144.47 on Friday partly on expectations that Huang’s comments will be bullish. They should be. Last Friday, January 3, Microsoft (NASDAQ:MSFT) announced plans to spend $80 billion this fiscal year building out data centers, underscoring the intense capital requirements of artificial intelligence. That’s up from $50 billion last year. On Friday, the S&P 500 rose 1.3%, led by a 4.5% jump in Nvidia, on the news from Microsoft.
Much of the spending on data centers by cloud infrastructure providers goes toward high-powered chips from companies including Nvidia Corp. (NASDAQ:NVDA) and infrastructure providers such as Dell Technologies Inc. (NYSE:DELL) The massive AI-enabled server farms require lots of power, which prompted Microsoft to strike a deal to reopen a reactor at the Three Mile Island nuclear power plant in Pennsylvania, the site of a notorious partial meltdown in 1979. Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOGL) also have signed nuclear power agreements.
Q4’s GDP will be reported on January 30. Along the way, the Atlanta Fed’s GDPNow tracking model is likely to show a growth rate running around 2.5%-3.0% (saar). The January 3 GDPNow estimate was revised down to 2.4% from 2.6% following the release of December’s National Manufacturing Purchasing Managers Index (M-PMI). But real consumer spending is still tracking at a solid 3.0%. The weakness was in capital spending on equipment, down 5.3%. However, intellectual property, which includes software, remains strong at 5.2%.
The M-PMI data for December showed that the overall index rose to 49.3 last month from 48.4 in November. So it remained below 50.0 for the ninth straight month and 25 of the past 26 months. However, both new orders (52.5) and production (50.3) rose above this level. Employment fell (from 48.1 to 45.3). We think this might show that productivity is increasing in manufacturing.
Despite the weakness in manufacturing employment, initial unemployment claims remained low at 211,000 during the December 27 week, and continuing unemployment fell by 66,000 to 1.844 million during the previous week.
Just as encouraging is that the jobs-plentiful series in the consumer confidence index survey rose to 37.0% during December from a recent low of 31.3% during September.
Consumers are still spending. The Redbook retail sales series shows a solid increase of 5.5% y/y through the week of December 27, 2024. It has a good correlation with the comparable growth rate for monthly retail sales excluding food services. Consumers also responded to auto dealer discounts.
The seasonally adjusted annualized rate for total new-vehicle sales rose to an estimated 17.2 million units in December, up from 16.6 million in November.
On the other hand, construction spending may be starting to lose its mojo. It has been moving sideways at a record high for the past eight months through November, reflecting a similar development in the construction of manufacturing structures, which has been soaring for the past couple of years.
What Could Go Wrong?
The outlooks for the economy and earnings in the new year are good, but valuation multiples are stretched. They must be discounting expectations that the current economic expansion will last for quite a while, which we think is a realistic possibility given our Roaring 2020s base-case scenario.
If we compare the current secular bull market in the S&P 500 since 2010 to the one that started early in the 1980s, we find that the former is closely tracking the latter.
This suggests that the stock market has plenty of upside over the rest of this decade, as it had during the second half of the 1990s—if it continues to closely track the previous one. The only problem is that valuations are much higher this time around: The S&P 500’s forward P/E at the end of 2024 was 21.6, well above around 13.0 in 1994.
The Buffett Ratio is currently around 3.0, well above around 2.0 at the peak of the 1999 tech-led bubble that was followed by the tech wreck in the early 2000s.
Again, with a little help from the permabears, here is a list of what could go wrong in early 2025, casting doubt on the outlook for a long expansion and causing valuation multiples to shrink:
Trump 2.0 has too many known unknowns currently. The stock market is anticipating that the incoming administration’s new policies will probably be bullish on balance. We agree with that assessment, but it may take some time to know that. There will be lots of new policy initiatives introduced and perhaps implemented by executive orders once President Donald Trump is inaugurated on January 20.
It’s hard to know how they’ll collectively affect the economy and whether they might produce negative unintended consequences. Higher US tariffs could boost inflation and could trigger retaliatory measures by trading partners. Mass deportation of illegal immigrants could disrupt some industries’ labor pools and put upward pressure on wages. Extending income-tax-rate cuts for consumers should bolster economic activity but could be inflationary. Deregulation and a lower corporate tax rate should also be stimulative and might fuel disinflation. Trump’s energy policies are also likely to be disinflationary.
The most widely unanticipated scenario is that Trump 2.0 will cause stagflation. That would be a bearish scenario for stocks, for sure. We include it in our bucket of bearish risks to which we assign a 20% subjective probability.
Interest rates might move higher. Perhaps the greatest known unknown is how the Fed and the bond market will respond to Trump 2.0. In his December 18 press conference, Fed Chair Jerome Powell said that the Fed doesn’t know what policies Trump 2.0 will include or how much they will impact the economy and financial markets. He also suggested that the Fed might pause lowering the federal funds rate partly because of this uncertainty.
Meanwhile, the Bond Vigilantes have been challenging the Fed’s three-monkeys cluelessness about the economy, inflation, and Trump 2.0. Since the FOMC started cutting the federal funds rate on September 18—lowering it by a total of 100bps through December 18—the 10-year bond yield has risen by as much. The Bond Vigilantes are protesting that the Fed is stimulating an economy that doesn’t need to be stimulated, that inflation remains above the Fed’s 2.0% target, and that Trump 2.0 might both revive inflationary pressures and boost the federal deficit.
The risk for stocks is that the Bond Vigilantes will be right, sending the yield back to 5%, which was last year’s high. In this scenario, the Fed might be forced to raise the federal funds rate, reviving fears of a recession. Valuation multiples would surely melt down quickly in that case. Again, we put this scenario in the 20% risk bucket.