Q1 Market Outlook 2025

What economists are projecting for the year ahead.

What a start we have had to 2025! It has been a volatile beginning, as many economists predicted, for various reasons summarized below. It's always great to stay up to date with what's happening in the markets and gain some insight about what may be to come.

Equities

• Stock markets have been off to a volatile start in 2025

• Stocks are currently on track for a second positive week in a row

• S&P 500 and Nasdaq fell Friday January 10th 2025 (each down over 1.5%)

  • The drop was due to a better than anticipated U.S. jobs report

• Economists are expecting a greater amount of volatility throughout 2025

• As historically proven with mutual funds, it's vital that during volatility investors stay the course and stay invested

• If you try to take the bad days off you could miss some of the good days

• Down days like what we saw this past Friday could potentially be a good opportunity to dip into the market

• In the year ahead it's likely that both the inflation story and U.S. Fed interest rate decisions will play a big role in the markets ups and downs

• A fairly volatile first 2 weeks of 2025 has given us a glimpse of what the rest of the year may hold

• Stay the course and if you are able to buy the dips (ie. Dollar-cost averaging approach, that has been a good strategy historically)

Bonds

• Over the past several months, the yield on the U.S. 10-year Treasury has steadily risen from a low of around 3.6% in September to 4.7% as of Friday

• This rise has been a bit of a surprise to many economists

• Last year, the expectation was that yields would come down as interest rates fell, and though the Fed did cut rates, the number of cuts didn’t live up to markets’ hopes

• Investors are now seemingly more cautious and expecting the Fed to only cut rates once or twice this year (this uncertainty has also been causing volatility)

• Yields are expected to come down, however it may take more time than we expected (possibly in the second half of this year)

  
  

Tariffs

• The markets seem to still be weighing how serious to take Donald Trump's threats of significantly raising tariffs (25% import tariffs on Canadian goods, 60% on Chinese goods) 

Undervalued Sectors

• Communications was the most undervalued sector coming into 2024,  it is now only 5% undervalued

• Real estate was the second most undervalued and following a slow 2024 is now the most undervalued

• Utilities was one of the more undervalued sectors coming into the year. In 2024, the sector rose almost 27% as utilities became a second derivative play on AI growth, as AI requires multiple times more electricity than traditional semiconductors. It is now one of the more overvalued sectors

• Stocks in the energy and healthcare sectors significantly lagged the broad market. With so much focus on AI over the year, we think the market is overlooking a lot of value in these two sectors as both remain at discounts of 10% and 8%, respectively

• Last, the basic materials sector was the only one to acquire a loss last year, but we think the market is overly pessimistic about its long-term outlook. We see a significant number of undervalued opportunities as the sector trades at a 7% discount to our fair values

The chart below shows the Magnificent 7 stocks (Apple, Tesla, Meta, Nvidia, Amazon, Alphabet, and Microsoft) and how much of an impact these stocks have had on the S&P 500 over the last 4 years. Economists project the gap between Magnificent Seven and the rest of the market expected to potentially narrow throughout 2025.

 Information sources used: Morningstar, Fidelity Investments and iA Clarington Investments

If you have any questions regarding the information above I'd be happy to schedule a call!

The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This blog was prepared by Alison Cannell, for the benefit of Alison Cannell, Financial Advisor with Cannell Wealth Management Inc., a registered trade name with Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia Financial Services Inc. The information contained in this blog comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability.

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