🔭 The 2025 OptimistiCallie anti-outlook

Hey hey, happy Monday.

Yep, I wrote you a piece about themes to watch in the year ahead. No, not that kind of outlook with useless price targets, predictions and meaningless mumbo jumbo.

An in–depth piece that highlights four very real trends that could shape your portfolio: productivity, policy, profits and…the end of pessimism?

An anti-outlook. We’ll go with that.

Today’s post is a little longer. It’ll take you 10 minutes instead of five. One cup of coffee instead of a few sips. But if you’re super busy buying gifts or whatever you do during the holidays, I divided it up into sections so you can read and digest at your own pace.

Finally, smash the button below to share OptimistiCallie with a friend 😊

It’s 2025 outlook season on Wall Street.

A time when market experts across the land peer into their crystal balls and give us long, in-depth proclamations about what the numbers and vibes tell them will happen in the upcoming year. Complete with predictions, year-end targets, cautiously optimistic mantras– the whole shebang.

Then they retreat to their ski chalets in the Poconos for the holidays.

Seems silly, but it’s real – except for the crystal ball part.

At this point, an outlook is table stakes for any market expert, and my email signature tells me I’m a strategist.

So I’ll indulge you.

I wrote something about 2025. But don’t you dare call it an outlook.

Why not? Because outlooks in the traditional sense – targets, predictions, proclamations and ski chalets – are nothing more than big wig sales fodder. Marketing gimmicks. Stretch projects for over-eager graphic designers. 

Outlooks may be shiny and bold, but they add little in the way of actual investing insights. And often, the predictions are flat-out wrong. People take them as gospel then get all up in arms when Joe from Insert Big Bank Here’s forecast for a 10% gain doesn’t pan out. Don’t say I didn’t warn you.

Still, I think there’s value in discussing the ideas and themes that could broadly shape markets and the economy in the year ahead.

So, I present to you: the OptimistiCallie 2025 anti-outlook.

No targets. No predictions. Definitely no ski chalets. Just the good stuff – the themes I’m watching in 2025, and what they could mean for your money.

First up…PRODUCTIVITY!

As an analyst, I’m constantly running a mental list of pros and cons.

Productivity—or the amount of output per worker—has been at the top of the pros list for a while, and it’s one of the most exciting undercurrents in today’s economy. So exciting, in fact, that when I talk about it, I tend to whip out this meme:

Seriously, here’s why I get so pumped about productivity – and why you should, too.

Productivity is a killer economic trend because it leads to stronger, more sustainable growth. Think a stronger growth rate and increasing profits without the threat of runaway inflation. Since 1950, the 10 strongest years for the U.S. economy have all been accompanied by higher-than-average productivity growth.

Sounds too good to be true, right? Well, it’s happening. Productivity has increased 2.5% annually over the past four quarters, the strongest growth outside of recessionary times since the mid-2000s.

There are a few reasons for this latest surge. The job market has been historically strong for three years now, allowing Americans to find gainful employment on their own terms. When you hold a job that you’re happy with and well-compensated for, you’re more likely to stick around and improve your skill set.

Also, companies got better at doing business. Supply chains broke, and systems changed as the world struggled to cope in the early COVID days. Those painful lessons led to greater efficiency on the other side.

After years of battling high inflation, we seem to have found the antidote in a more efficient workforce, stronger supply chains, and – dare I say it – AI. Three trends that’ll likely stick around as we head into 2025.

I know what you’re thinking. Callie, this is a really interesting economic theory, but how the heck will it make me money?

Well, I can’t guarantee performance and I don’t do targets, but I think productivity is key to putting us in the ballpark of higher prices next year.

If you believe stock prices follow earnings and the economy over time, you’d naturally want to see improvement in both areas. Growth naturally comes from more widgets being produced — either by adding more workers or by training your current workforce to produce them better.

We’re stuck in the great wait. Companies aren’t hiring or firing en masse. Workforces are stagnant, and the pool of available workers could start to dwindle. The economy’s growth prospects could depend more on how much a set amount of people can produce. 

And productivity growth is what the stock market prefers. Over the past seven decades, the S&P 500 has gained an average of 12% in years with higher-than-average productivity vs. 2% in years with average to lower-than-average productivity.

PRODUCTIVITY!

What this means for you:

A stronger economy in spite of slower hiring. Fewer job openings, but a better chance at feeling fulfilled in your job. Maybe a raise, maybe a stipend for that certification you’re eyeing.

Now, let’s talk about a less exciting p-word that geese definitely aren’t screaming about: policy.

There have been a lot of questions lately about what markets will look like under the incoming administration.

My answer is unsatisfying, to put it mildly. I have no idea what the proposed plans will mean for our portfolios. In fact, I’m not sure many (any?) people can definitively say which policies will be passed, what they’ll look like in practice, or how effective they’ll be.

Investors have already cast their vote, though. U.S. stocks just capped their strongest month versus their international counterparts in 26 years. Markets clearly think a strong dollar and a pro-America stance could lead to American dominance.

Seems logical if reality was neat and tidy. Unfortunately, it’s not.

The world is intricately connected. Imported goods make up about 16% of Americans’ spending. About 40% of S&P 500 companies’ revenues come from overseas. Foreign-born workers are about 20% of the U.S. labor force. Smite the rest of the world, and you’re bound to get some blowback.

We’ve sort of been here before, too. In November 2016, the dollar surged and U.S. markets beat the rest of the world by a healthy margin as people were convinced that America would gobble up the global economy. But over the following 12 months, international stocks outperformed the U.S. by four percentage points, and global trade power didn’t meaningfully tilt toward our shores.

I have no idea if markets are heading for the same fate. But what I do know is that policy is rarely cut and dry, yet we’re all acting like it is. 

That brings me to the Federal Reserve – those lovable pocket-protector wearing, rate setting nerds in DC. The White House’s policy may make headlines, but the Fed’s interest rate policy could be the most important undercurrent for your money.

Bond market investors think the Fed could implement four small rate cuts next year. If that’s true, it means inflation stays under control, the job market hums along at an acceptable pace, stocks rise, and everybody’s happy.

But again, reality. Slow rate cuts lead to high mortgage payments and a forever-frozen housing market. Everything is a tradeoff, and we might be trading affordability for employment once again.

Also, nothing lasts forever. Even rate cuts.

I know. The Fed literally just started, and we’re not ready to kiss this sweet era of hopes and dreams goodbye. But it will end, potentially next year.

If everything goes to plan, then the Fed will only cut rates back down to neutral – the theoretical rate that neither boosts nor holds back the economy. Neutral isn’t that far away, either. Just seven small rate cuts could get us there (if Fed projections are accurate), with nine meetings between now and the end of 2025.

Expect markets to start grappling with this before the last cut.

What this means for you:

Noise. Lots of noise. Potentially big changes in trade and government policy. A good chance of slightly lower loan rates and slightly lower savings rates. Small steps closer to a pre-COVID normal (whatever normal is), and shallower market drops as long as the economy holds up.

I’ve talked a lot about the big picture. The broader market.

But let’s not forget that the stock market depends on the success of thousands of individual companies: the market of stocks.

Collectively, stocks have been in a bull market for two years now. This simply means that the S&P 500 – an index of America’s 500 largest publicly traded companies – has been climbing for two years without any major crashes.

If you’re still confused by the beefy two-horn animal analogy, I broke it down more in this post.

But this is no ordinary bull market. It started while the Fed was increasing interest rates – the first for any bull market in 50 years. Market gains have been driven by healthy restraint, not euphoria. Only about one in every four S&P 500 stocks have beaten the index since the bottom in October 2022.

Something changed in the middle of this year, though. Since June, 56% of stocks have beaten the S&P 500. The Russell 2000, an index of smaller stocks, has outpaced the S&P 500 by six percentage points after trailing for most of the bull market. The unloved stocks – banks, power companies and real estate – are finally gaining ground on the sexy, attention-grabbing names.

You think this bull is dying? I’d say it hasn’t had a chance to live yet. And now, the Fed is finally providing some oxygen to it through rate cuts.

Imagine how sturdy this rally could be with all stocks moving higher together, as what may be the case in the months ahead.

Company profits back this up, too. Over the past two years, the clear trend in profits and in markets has been tech versus everything else. This year, tech and communication services earnings are expected to grow 21% as earnings for the rest of the S&P 500 could flatline, according to Wall Street analysts surveyed by Bloomberg. In 2025, however, non-tech stocks may catch up, with profits in sectors outside of tech and communication services forecast to grow 12%.

In fact, every sector is expected to deliver higher profits next year for the first time since 2018.

Now, the risks. Earnings and stock prices don’t always move in unison, even if a sector’s money-making potential often hints to other longer-terms trends at play. We may be getting our hopes up too much. A higher bar is easier to miss.

But if the stock market and the market of stocks start rowing in the same direction, we could be blessed with a broader – and sturdier – rally.

What this means for you:

A bull market that actually feels like a bull market. Less dependence on tech, and fewer days of one big stock driving all of us crazy. One can dream.

A new year doesn’t magically change the calculus for your investments.

But it’s a good time to pause, reflect and set expectations.

And expectations, my friends, may be our biggest pitfall in 2025.

Face it. We’ve been spoiled.

The S&P 500 has climbed more than 20% for two straight years. If you’re expecting a repeat of 2024, you’re asking a lot of the market gods.

The stock market is more capable of big years than most think, but three subsequent 20% gains has been a rare feat. In fact, it’s only happened once in the past seven decades.

I think it’s important to recognize just how good we’ve had it, and what got us here. We’ve approached every economic report and headline with a load of skepticism, only to be pleasantly surprised more often than not. 

Fear has been our biggest asset as investors. And now, the fear seems to be melting away. 

Rightfully so, but are we becoming too complacent?

Maybe.

One thing I think a lot about is the rally’s DNA in the year ahead. Tech stocks are expensive, and the good fortune of profit growth and lower rates is spreading to other industries. Tech, however, may be one of only a few sectors that has enough star power to propel the stock market to big gains.

Since 1990, there have been 12 years in which the S&P 500 has gained 20% or more. Tech was the best-performing sector in seven of those years. You may curse how reliant we’ve become on the Magnificent Seven stocks, but on balance, they’ve given us some extraordinary years. Can the stock market blow us away for a third year if chemical processors or toothpaste makers take the lead?

That, and if tech’s favor turns, are we prepared for the fallout?

Throughout history, we’ve seen that the biggest selloffs happen during economic crises with unexpected consequences. The biggest risk to your money next year may be a recession solely because markets follow earnings and the economy over time. Recession-fueled market crashes can be huge opportunities if you’re prepared for them.

A good economy doesn’t guarantee a smooth market rally, though. Inconsequential 5 to 10% selloffs can hurt in the moment, and they’ve happened in 80% of the last 50 years. Statistically speaking, we’ll likely see one next year. We’ll definitely have enough headlines to spark one.

When expectations are too high, small selloffs can turn into something bigger. Even worse, we can collectively ignore any brewing trouble.

Invest in good times and bad because you’ve got wealth – and a legacy – to build. 

But don’t be naive. 

Stay cautiously optimi – never mind.

Thanks for reading!

Callie

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