The year 2024 was a record setting year for stocks! The Dow Jones Industrial Average (see chart here) set record high in 2024 trading over the 45000 mark, the S&P 500 (see chart here) also set a record high before year end trading over the 6000 mark. The Nasdaq Composite (see chart here) joined the record high club as well trading over the 6000 mark as did the small-cap Russell 2000 (see chart here).

As 2024 unfolded, seemingly record high after record high was hit. Furthermore, as the S&P 500 (see chart here) hit an all-time high in December trading up over 23% on the year, The S&P in 2023 also notched record gains so between 2023 and 2024 the S&P 500 is up over 50% in total over the past two years. Needless to say, I think we may be a bit overbought, especially as I look at the price to earnings ratio of the S&P 500 which closed the year just under a 30 p/e ratio. Now to put this into perspective, the S&P 500’s historical price to earnings ratio average trades in the 15-17 p/e zone. Yes, the current price to earnings ratio of the S&P 500 is nearly twice the historical average.

Something must give here in 2025. Either the economy takes off to where corporate America can earn the right to maintain a 30 p/e, or the markets eventually find a way to revert to the mean. Why have we seen such a strong performance in stocks and other asset classes? Simply put, the liquidity that has been pumped into the system for years now continue to be put to work in the markets. Plus, when you add in the policies of the incoming administration, especially on the tax rate side of the equation it’s no wonder why we keep setting records across the board.

Overall, I am optimistic here in 2025 pertaining to stocks, the economy and how the Federal Reserve will manage interest rates. However, I would not be surprised to see an increase in volatility especially as everyone awaits to see how this new administration will execute.

Happy New Year and good luck to all 🙂

~George