The 2024 trends and outlook for 2025 are reasons for the market to show some holiday cheer and rally through the year’s end. Not only is the S&P 500 (NYSEARCA: SPY) in an earnings-driven uptrend but the stage is set for tailwinds to develop next year and sustain the trend into 2026.
Falling interest rates and deregulation go hand in hand with rising stock prices because of increased business investment, accelerated economic activity, and earnings growth of the nation's largest companies. Earnings growth is important because it fuels a robust outlook for capital return growth, which includes dividends and share buybacks.
The S&P 500 has been climbing a wall of worry for the last two years, with high inflation on one side and the risk of a recession on the other. Meanwhile, despite the risks, the S&P 500 returned to earnings growth and has sustained sequential quarterly acceleration with an outlook for the trend to continue.
1) Bull Market Supported by Cash Flows and Climbing a Wall of Worry
The consensus forecasts for Q4 2024 and the full-year 2024 S&P 500 earnings growth have come down from their peaks but remain consistent with an accelerating growth outlook, expecting more than 12% in Q4 and a higher pace in the first half of 2025. Capital returns are growing by a high-single-digit amount, with S&P 500 dividend payments up 2.2% and repurchases nearly 35% in FQ2. Total capital returns are expected to remain strong in FQ3 and Q4 2024 and to accelerate in 2025, growing by another mid-teens figure, providing a strong tailwind for stock prices.
2) S&P 500 Headwinds Ease, Tailwinds to Form in 2025
Easing monetary policy headwinds and deregulation are expected to create tailwinds within the economy. The full impact of Trump’s policies is unknown, with lower taxes and deregulation offset by tariffs, but one thing is clear. The result of his policies during the first term created volatility, but the trade war lasted only so long, and businesses adapted and thrived. The economic situation in late 2019 and the first two months of 2020 were solid, driving a similar outlook for earnings as in 2024 and 2025, with accelerating growth expected to continue sequentially until COVID entered the picture.
3) Healthy Labor Data Underpins Economic Activity
Healthy labor markets are a driving force in the economy. The labor data has cooled from the peaks during the COVID pandemic but remains strong relative to historical levels. Job creation, openings, turnover, and layoffs are all consistent with the 2019 or early 2020 economy, which was considered strong at the time. Initial claims are the leading indicator for labor market health, and they are trending within very healthy levels along with the total claims data. The initial claims are running in the low 220,000 range, aligning with past periods of economic strength and bull markets supported by consumer spending.
4) Resilient Consumers Spend Big on Small Items
The health of the labor market is seen in the consumer data, another driving force for stocks. Retail sales are growing at a solid, if low, single-digit figure and outpacing inflation slightly. The October data shows retail sales up by 2.8%, edging out core inflation by 20 basis points as consumers focus on smaller items versus big-ticket items.
The resilient consumer is seen in the results from retailers like Walmart (NYSE: WMT), Williams-Sonoma (NYSE: WSM), and TJX Companies (NYSE: TJX), which report strength in all categories and reveal strength in all consumer price points. These companies also provided improved guidance, citing revenue and margin trends that may be cautious. There is a high likelihood of outperformance during the holiday reporting season. The takeaway is that the forecasts for holiday season shopping are likely low and will rise or be beaten, providing an additional lift for stocks.
