After a strong two-year rally for the U.S. equity market, JP Morgan strategist Michael Cembalest is urging caution as 2025 begins. The S&P 500’s back-to-back gains of over 20%—a feat achieved only 10 times since 1871—raise questions about whether the market can sustain its momentum.
Key Takeaways from Michael Cembalest’s Outlook
Historical Context of Market Rallies
The S&P 500 gained 23.3% in 2024, following a 24% rise in 2023.
Similar multi-year rallies occurred only during the 1990s tech boom and the Roaring Twenties, both of which were followed by notable corrections.
Cembalest predicts a 10%-15% correction in 2025, citing stretched valuations as a key risk.
Concerns Over Economic Policies
The incoming Trump administration’s policies—ranging from deregulation and tax cuts to tariffs and budget deficits—are flagged as potential market disruptors.
Cembalest refers to policymakers as "alchemists," warning that their interventions might "break" something in the economy.
Treasury Yields as a Market Indicator
10-Year Treasury Note: Expected to remain in the 4.5%-5.0% range under favorable conditions.
A sustained rise above 5.0% could signal deeper economic troubles.
Reasons for Optimism Amid Uncertainty
Soft Landing Continues
The Fed’s rate hikes have not triggered a recession, marking a rare success in managing inflation without collapsing the economy.
The labor market is easing but remains resilient.
Capital Spending Growth
Business and consumer investments are growing, aligning with a 2.5% GDP growth rate.
Deregulation Opportunities
Light-touch deregulation, coupled with a recovering venture capital market, could sustain economic growth and market confidence.
Market Update and Buzz
Major Indices and Treasury Yields
U.S. stocks opened higher as Treasury yields eased, indicating cautious optimism.
The 10-year Treasury yield remains a focal point for gauging economic policies and inflation trends.
Top Movers
Unity Software: Surged 9%, possibly influenced by social media hype.
Tesla: Down 5% following disappointing delivery numbers and tragic incidents involving its vehicles.
Other Highlights
Weekly jobless claims fell to an 8-month low, signaling strength in the labor market.
Construction spending data is due later in the day, adding another layer of insight into economic conditions.
What Lies Ahead for Investors
Cembalest advises maintaining liquidity to capitalize on potential market volatility in 2025. While the S&P 500 could still end the year higher, the likelihood of a correction necessitates strategic positioning.
Watchlist for Investors
Policy Developments: Monitor the impact of the Trump administration’s economic agenda.
Treasury Yields: A rise above 5% could signal deeper market risks.
Sector Rotation: Broader market participation beyond tech could stabilize growth.
Conclusion
As the U.S. stock market embarks on 2025, investors face a complex environment shaped by elevated valuations, policy uncertainty, and historical market patterns. While opportunities remain, the path forward may require careful navigation and adaptability to shifting dynamics.
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