2025 Market Outlook: Rational Exuberance?

There’s a Case for Optimism in the Year Ahead

Stocks had a strong 2024, with the S&P 500 up 21% leading into November.1 Since the election, markets have rallied to even higher levels. That means investors, many of whom were worried about stock valuations before the election, have much to consider heading into 2025. Will policy changes be enduringly bullish for stocks? How strong are the fundamentals supporting the current rally? What might the rate-setters at the Federal Reserve do?

Our characterization of the year ahead? There seems reason for some exuberance—but a rational exuberance, based upon a plausible foundation of corporate and economic health. Our key observations for 2025 include:

  • Stocks May Have Less Risk Than You Think
  • Fixed Income Markets Face Challenges
  • Equity Income Presents Opportunity
  • Bitcoin May Be a Diversifier

Stocks May Have Less Risk Than You Think

There’s no getting around the fact that stocks are expensive. With the 10-year Treasury yield near its long-term average of 4-4.5%, a typical range for a stock’s trailing price-to-earnings (P/E) multiple would be 18-20X.2 It currently stands at roughly 25X.3 What might have changed to make an elevated P/E multiple be less risky for investors? The answer is leverage. Stocks have less than a quarter of the leverage today than they had 20 years ago, with S&P 500 net debt/EBITDA falling from 5X to close to 1X today. That is a substantial reduction in financial risk.

S&P 500 Stocks

Another way to illustrate today’s currently lower levels of leverage is to compare the return on assets (ROA) of the S&P 500 with return on equity (ROE).

S&P 500 return