Since November, the S&P 500 has experienced several price swings due to varying macroeconomic conditions and shifts in market narrative. Key factors include inflation expectations, growth, labor data, and Fed commentary. Despite the volatility, the S&P 500 remains close to all-time highs, highlighting the benefits of staying invested to ride out short-term fluctuations.
Key Events Contributing to Market Swings in Q4 and early 2025:
- Election Day Rally: The market reached new highs once electoral votes shifted in Trump’s favor, driven by investor optimism about his pro-growth policies.
- Post-Election Inflation Fears: Tariff induced inflation concerns, and a resilient labor market led to a steepening Treasury yield curve, causing rate-sensitive equities to largely price out a lower rate environment. The Magnificent-7 dominated the S&P 500, with strong balance sheets and AI hopes, outperformed cyclicals during this period.
- December FOMC Meeting: Despite a 25-basis-point rate cut, hawkish Fed comments caused a nearly 5% drawdown in the S&P 500. In addition, strong growth data and stubborn inflation prints pressured equities. The Federal Reserve made it clear that they are prioritizing fighting inflation, even at the cost of growth.
- CPI Data and Trump’s Inauguration: Lower-than-expected CPI numbers pushed equities higher in early 2025. The market rallied further after Trump’s inauguration as he did not prioritize imposing tariffs.
In conclusion, the interplay of these events has created a choppy market environment. With high Q4 earnings expectations, US equity valuations are elevated. A sustained higher interest rate environment could exert downward pressure on economic growth and negatively impact corporate earnings. Consequently, future economic data prints, especially inflation numbers, will be important in assessing cross asset return expectations for this year.
From an asset allocation perspective, we continue to favour global diversification to deal with unexpected surprises this year, even though some of them could very well be positive surprises, especially for international equity markets.
DISCLOSURES
The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to this information’s accuracy, completeness, or reliability. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth nor the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.
This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.
The Standard & Poor’s 500 (S&P 500) Index is a free-float weighted index that tracks the 500 most widely held stocks on the NYSE or NASDAQ and is representative of the stock market in general. It is a market value weighted index with each stock’s weight in the index proportionate to its market value.
