Updated 2025 Stock Market Outlook

Happy New Year everyone!

In some ways a lot has changed since I last provided my 2025 Stock Market Outlook in September. And in some ways not much has changed at all.  

That means the best use of our time today is to update that outlook to get ourselves properly aligned for the investment year ahead. 

Market Commentary

We are entering year 3 of the new bull market which started in October 2022.

The good news is that the average bull market lasts for 63 months so plenty of time left on the clock. With no recession in sight, then not much concern of a bear market emerging in the year ahead.

However, as you will see below, the bad news is that the historical trend for year 3 of a new bull market is pretty lackluster.

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

+24.89% Year 2

-???% Year 3

The trend is not our friend as we enter 2025.

Or to be clearer...the trend is not the friend of the S&P 500.

That’s because valuations are getting pretty fully inflated. Even bordering on “irrational exuberance” levels for bloated Mega Caps.  

This PE chart by market cap below tells the full story:

There is no denying what is found in this chart.  

Mega caps (aka Mag 7) are bloated...even above 1999 tech bubble level.

Large caps are pretty much fully valued.

Small and Mid Caps are not only attractively valued versus their larger peers... but actually attractive versus their historical average at this stage of a bull market.

Given the above information is why I only have a 6,300 year end target for the S&P 500. And to be honest, a breakeven finish tussling with 6,000 the entire year would not surprise me at all. The early January results seem to confirm that narrative.

Gladly, we can lean into small and mid caps that should be set to outperform. In fact, it is the strength of the Zen Ratings to discover this kind of “under the radar” stocks with sparkling fundamentals.

The kind of companies that bang out a series of beat and raise earnings reports that draws more attention leading to serious momentum in shares. The beauty is we get to buy them early in the game before many notice, leading to ample outperformance. 

The next question needs to be a focus on what industries to overweight?

The playbook for when rates get lowered is to go for more economically sensitive groups. That is because lower rates typically leads to healthier economic growth > earnings growth > share price growth.

The industries that stand out to me are:

·    Industrials

·    Financials

·    Basic Materials

·    Consumer Discretionary

It’s also wise to consider groups that benefit from lower rates like home builders and auto. Yes, those groups have been bludgeoned since the 12/18 Fed announcement to slow down the pace of future rate cuts.

But that sell off is the overreaction by active traders who care more about the next 12 days than the next 12 months.

There is simply no way to look out the next 1-2 years and not see lower rates. And thus no way not to appreciate how that benefits these groups.

That is why I am patiently holding on to many of our plays in these affected groups through this recent sell off as I expect an ample bounce ahead. This should have them back in the black and sporting impressive gains by end of the year (2026 also looks good for these groups).

To be clear, we will buy large caps here or there. And go into industries outside those listed like technology.

Meaning we want a diversified portfolio of attractive stocks. Not all of them are going to work...but most should and that is where the long term outperformance will come from.

The key no matter what we buy in 2025 is value. Again, check out that PE chart by market cap shared above to understand why.

If the market is logical...and that’s sometimes a big if...then investors should rotate be more value conscious in the year ahead. If not, then it sets up for a valuation bubble problem like the start of 2000 when the air was forced out of the inflated internet stocks.

As I look back at my personal results, I smile in the fact that I personally gained +16% in 2000 because investors did rotate to better value propositions.

Then in 2001 I went on a bargain basement buying spree and picked up stocks like Amazon and Priceline (now Booking) for obscenely low prices and have enjoyed extraordinary gains in the years since.

I do not expect this to happen again...but good to know that we have a proven playbook for handling the situation if it does ever arrive again.

For now, I just see this as a typical year 3 for a new bull market where the in-fashion names are a bit bloated and time for other stocks to have some time in the sun. 

If conditions change...so too will our strategy. For now, I think we extremely well positioned to excel in the coming year. 

What To Do Next?

Discover the Zen Investor portfolio filled with my top stocks for the year ahead. 

And yes, each pick is harnessing the full power of the Zen Ratings model. 

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

Discover the Zen Investor & Top 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.