Should you still be invested in US stocks in 2025? We believe so, as there are no better alternatives, and US stocks remain in a bullish trend. Our simple yardstick for identifying a bullish market is whether the index is trading above its 200-day moving average. At present, many major markets, including Europe, Japan, India, and China, are below their respective moving averages, indicating bearish conditions. In contrast, US stocks are still trading above this threshold.
Some market commentators are raising concerns about the return of inflation. While most commodity prices have been subdued due to past Fed rate hikes, last Friday brought a sharp rebound in prices, with crude oil price jumping more than 3% in one day. Although a single day’s movement doesn’t confirm a trend, it’s worth keeping a close watch on commodity prices moving forward.
One of the key issues affecting the market has been the rise in bond yields, particularly in longer-term bonds. For instance, the US 10-year bond yield was at 4.328% a month ago but climbed to 4.765% as of January 12, 2025, while the 20-year bond yield exceeded 5%. The upward movement in longer-term yields can be attributed to a couple of factors. First, the economy has remained resilient, with employment rates staying higher than expected and inflation yet to reach the Fed's target of 2%. During its last meeting, the Fed signaled that there would be fewer rate cuts in 2025, suggesting that interest rates are likely to remain higher for longer, which has contributed to the stock selloff. Second, there is anticipation that Trump will adopt an expansionary fiscal policy, which is expected to drive US debt even higher. As a result, bond yields have had to rise to compensate for the increased risk associated with US bonds.
Indeed, US stocks began to pull back from their highs in December 2024, and this downtrend has carried over into 2025. Over the past month, major US indices have declined by more than 3%. Tech stocks demonstrated more resilience, as reflected by the Nasdaq 100 (QQQ), which fell by 3.66%. In contrast, traditional sector stocks, as measured by the Dow Jones (DIA), experienced a larger decline of 4.76%. Small-cap stocks, represented by the Russell 2000 (IWM), were hit the hardest, with a steep drop of 7.61%.
However, even in the years with positive returns, the gains were typically more muted, except during the exceptional run in the 1990s. In that decade, the S&P 500 delivered five consecutive years of over 20% returns. Today’s conditions are far from the roaring 90s, so it is more reasonable to expect that the S&P 500’s performance in 2025 will likely fall short of the previous two years.
Looking at past data, back-to-back 20% gains in the S&P 500 are rare, having occurred only eight times before the 2023-2024 period. While the sample size is limited, history tells us that half of the time, the S&P 500 posted losses in the following year, while the other half saw positive returns.
Finally,After the S&P 500 delivered over 20% returns in two consecutive years (2023 and 2024), investors are now questioning the sustainability of the rally and wondering whether stocks will underperform in 2025.
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