2025 Stock Market Outlook

The market quickly erased the losses from the early August correction. This had us flirting once again with the all time highs of 5,669 for the S&P 500 (SPY) as we await the Fed’s rate decision at their next meeting on September 18th. 

There is not much doubt about a rate cut coming. Rather it is how large of a cut...the pace of future cuts...and thus how much of a catalyst is on the way to boost corporate earnings and stock prices???

No matter how you slice it...we are in a bull market. The real puzzle is about the pace of gains in the future and which groups are likely to outperform.

This is why today presents a great opportunity for us to push back from all the short term noise in price action (For example, the sell off to start September which is likely no different than the aberration of the early August decline). 

Instead, we will concentrate on the long term picture, like the stock market outlook for 2025. 

Since investors typically look out 4-6 months in making their investment decisions today...then all the more reason to focus on the outlook and investing plan for the coming year. That will be the focus of our Market Commentary section today. 

Market Commentary

So, let’s take it from the top with following series of annual performance data for the S&P 500 from the most recent bull markets. No doubt you will be able to spot a consistent pattern for what to expect in year 3 of a bull market like we are heading into in 2025:

2003 to 2008 Bull Market

+26.38% Year 1

+8.99% Year 2

+3.00% Year 3

2009 to 2020 Bull Market

+23.45% Year 1

+12.78% Year 2

-0.01% Year 3

2020 to 2022 Bull Market

+16.26% Year 1

+26.89% Year 2

-19.44% Year 3

2022 to 20?? Bull Market

+24.23% Year 1

+18.42% Year 2 (as of end of August)

-???% Year 3 (what lies ahead in 2025?)

The pattern is clear. The big gains come in the first 2 years of a bull market as stocks bounced from oversold bearish conditions. And then in year 3 the overall market takes a breather. 

This is kind of like an athlete having a lull in the middle of the action before a second wind comes in to carry them the rest of the way home. That is a pretty solid analogy when you realize the average bull market lasts 63 months (5 years and 3 months). So indeed year 3 is stuck in the middle. 

I don’t have much fear of another -19.44% drubbing on the way like we saw in 2022. Rather I see the S&P 500 currently as fully valued and thus expect a return fairly close to 0% on the year. 

But that is the movement of the average stock. The worst will fall. And the best will rise. 

Obviously, our goal is to increase the likelihood that we are adding the best stocks to our portfolio. Those that will be rising even in sub par overall market conditions. 

I think it should be clear that the old investing plan from the early stages of this new bull is now dead. That is an over-reliance on the Magnificent 7 and other “in fashion” tech names that have bloated valuations. 

We have seen a few tech sell offs throughout the year like the start of August. This happened once again to start September including a nearly 10% one day scalping of the beloved NVDA shares. 

Plain and simple, I see investors continuing to inject Ozempic into the morbidly obese valuations of these stocks which is one of the big reasons that results for the S&P 500 will likely be so tame.

I very much expect the 4 year dominance of large caps to end with money finding its way to deserving stocks in the small to mid cap space. 

What makes them deserving? 

Healthy growth and reasonable valuations. 

Yes, I know how incredibly obvious that sounds on the surface. Yet this is the time honored KISS principle of investing. 

The current value of a future stream of earnings is the best way of calculating the fair price for a stock. Thus, healthy earnings growth (like beat and raise quarters with estimates going higher) is a vital sign that a stock is likely to go up in price. 

This evaluation is at the heart of what Wall Street analysts do on a daily basis. And it is the top 25% of these analysts we focus on as part of our 4 step stock selection process in Zen Investor. 

Beyond that we also take a look at the Zacks Rank for stocks which is a quantitative model focused on the movement of earnings estimates. In general, 

estimates going up = outperformance

estimates going down = underperformance 

And then we add on top the benefit of the POWR Ratings model from StockNews. Not only does the 13 factors of Growth measured in the model point to stocks more likely to have beat and raise earnings reports in the future...but also the 31 factors of Value make sure you don’t overpay for those stocks. 

This is a long way of saying our 4 step process is well aligned with picking stocks more likely to thrive in the market environment in 2025. 

On top of that we want to be concentrated in the industry groups most likely to outperform. Since rates are set to go lower, then it points to 2 different categories of stocks: 

First, economically sensitive industries that should see higher earnings growth as rates go lower and GDP picks up such as:

• Industrials
• Financials
• Basic Materials
• Energy
• Consumer Discretionary

Second, you want industries that benefit directly from lower rates such as:

• Auto
• Banks
• Income Stocks
• Housing (like home builders)

When you look at the groups above, you will realize we have been lining up the Zen Investor portfolio to check off many of these preferred boxes to own stocks likely to outperform. 

The biggest box not checked is banks because I have not settled on the 1 or 2 stocks I want in this very fragmented space. That is why I have been recommending the shares of the Regional Bank ETF (KRE) in one of my other portfolios for those who want banking exposure.

As for tech stocks, as a group I think they will be average performers. The key to success with hand selecting the best picks in the group is what I already shared above. 

Healthy Growth + Reasonable Valuations

Or what some might call a GAARP approach (Growth At A Reasonable Price). That is certainly the case with our current tech selections.  

Everything with investing is subject to change. So, this plan what makes sense given the current facts in hand.  

As the facts change...so too will our investing approach. 

For now, I think we are well aligned for what happens going into year 3 of this bull market cycle. Now let’s dig in with our...

What To Do Next?

Discover my Zen Investor portfolio filled with 14 top stocks with tremendous upside potential. 

What these stocks have in common is that each has made it through the gauntlet of our proprietary 4 step process that weeds out weaklings leading to more 100%+ winners. 

If you are curious to learn more, and want to see my top 14 stocks, then please click the link below to get started now. 

Discover the Zen Investor & Top 14 Stocks >

Wishing you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)

Editor of the Zen Investor

Want to get in touch? Email us at news@wallstreetzen.com.