Following a record-setting year for U.S. equities, investors anticipate leveraging seasonal momentum into mid-January, where a wave of economic indicators and a shift in leadership in Washington could ignite market activity.
The S&P 500 (.SPX) experienced an increase of approximately 25% in 2024 up until December 27, while the tech-focused Nasdaq Composite index <.IXIC >, which crossed the 20,000 mark for the first time in December, has seen a rise of over 31%.
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However, on Friday, equities dipped due to some profit-taking and uncertainties regarding potential market performance in January, according to market analysts and traders.
“There are worries that perhaps the early part of (next) year may involve a repositioning and reallocation of assets, and those trading today and next week are likely positioning themselves in light of that,” remarked Robert Pavlik, senior portfolio manager at Dakota Wealth.
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Historically, stocks tend to perform well during the last five trading days of December and the first two days of January, a trend known as the Santa Claus rally, which has led to an average S&P gain of 1.3% since 1969, as detailed in the Stock Trader’s Almanac.
Despite the decline on Friday, over the last five trading sessions, the S&P increased by 1.77%, while the Nasdaq saw a rise of 1.8%.
The duration of the upward trend will hinge on various factors that may influence the markets in 2025.
U.S. employment statistics set for release on January 10 are expected to offer investors renewed insight into the resilience and robustness of the U.S. economy. Job growth saw a resurgence in November after earlier setbacks caused by hurricanes and strikes.
The market’s stability will be tested soon after, as U.S. firms commence their fourth-quarter earnings reports.
Investors project a 10.33% growth in earnings per share for 2025, compared to a forecasted 12.47% increase for 2024, according to LSEG data, although enthusiasm surrounding President-elect Donald Trump’s policy initiatives is expected to enhance the outlook for specific sectors such as banking, energy, and cryptocurrency.
“There’s optimism that tax reductions and regulatory relief will occur next year, which would bolster corporate earnings that fundamentally drive the market,” noted Michael Rosen, chief investment officer at Angeles Investments.
Trump’s inauguration on January 20 could also introduce some volatility to the markets. It is anticipated that he will sign at least 25 executive orders on topics ranging from immigration to energy and cryptocurrency on his first day.
Additionally, Trump has indicated the possibility of imposing tariffs on Chinese goods and taxes on items from both Mexico and Canada, along with stricter immigration policies, which could lead to expenses that businesses may eventually pass on to consumers.
Helen Given, associate director of trading at Monex USA, pointed out that a new administration always introduces a significant level of unpredictability. She also suggested that the implications of the anticipated trade policies under Trump may not yet be fully reflected in global currency markets.
“We’re looking ahead to see which of those proposed policies actually get implemented and which might take longer,” Given stated, noting an anticipated substantial effect on the euro, Mexican peso, Canadian dollar, and Chinese yuan.
The conclusion of the Federal Reserve’s initial monetary policy meeting of the year at the end of January may also pose challenges to the U.S. stock rally.
Stocks dropped on December 18 when the Fed executed its third interest-rate cut of the year and indicated fewer cuts for 2025 due to an uncertain inflation scenario, disappointing investors who had hoped lower rates would enhance corporate profits and valuations.
Nevertheless, this situation could benefit alternative investments such as cryptocurrencies. The incoming crypto-friendly Trump administration adds to a variety of factors boosting confidence among crypto investors, explained Damon Polistina, head of research at investment platform Eaglebrook Advisors.
Bitcoin surpassed $107,000 this month amid expectations of more favorable Trump policies.
