This week in the markets: ending 2024 on a high

It’s the last full trading week before the end-of-year holidays and markets are closing out 2024 on the front foot. Stock markets, notably in the US, are at or close to their all-time highs. What does 2025 hold in store?

Looking back and forward

The S&P 500, which has led the charge for many years now, is up nearly 30% year to date at just over 6,000. Even the equal weighted index, less skewed by the remarkable performance of the Magnificent Seven, is nearly 20% higher. After a strong 2023, the performance of markets in 2024 has been a pleasant surprise for many investors.

The rally has been driven by an unusual combination of rising earnings and higher valuations. That may not continue into 2025, and earnings will have to pick up the baton. Fortunately, forecasts remain positive, but they will need to be because the price of shares relative to those profits is historically high.

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There’s growing talk of a stock market bubble forming but identifying these in real time is hard. Markets could continue to rise in 2025. Missing out on the final months of the bull market in 1999 was painful for anyone who didn’t buy into the dot.com bubble mentality. 2025 could be a repeat. 

What are the risks for investors next year? First, that the Magnificent Seven runs out of steam. The concentration of the market is greater than at any point since the late 1990s and before that the Nifty 50 period in the 1970s. Any reversal for the big tech stocks would be bound to drag the market lower given their dominance of the overall index. 

A second risk is that inflation refuses to lie down. The pattern of prices today has worrying echoes of the late 1960s and early 1970s. Central banks will have learned the lessons of that period when inflation seemed to have been tamed but took off again with a vengeance. The market is not pricing in that possibility.

Before we get there

But that is all for next year. Before then, the year closes out with a busy week of data and key central bank decisions.

The Federal Reserve is first out of the blocks with the final interest rate call of 2024. A quarter point cut to between 4.25% and 4.5% is expected. The market is then pricing in another 50 basis points of cuts by next September. But with the economy still strong, with a buoyant labour market, those cuts are far from guaranteed. The final estimate of third quarter GDP this week is expected to show a 2.8% growth rate.

Over here, too, there’s plenty to watch out for this week. The health of the consumer economy will be indicated by retail sales numbers (they’re out in the US as well). Wednesday sees the last inflation print of the year with another rise to 2.5% (2.3% in October) pencilled in. Then on Thursday, the Bank of England decides whether to cut interest rates again. It’s not expected to, but any further deterioration in the economy could see a renewal of rate cuts early next year. The UK contracted in October for the second month in a row.

Fund picks for 2025

Investing in the later phases of a bull market is difficult. You don’t want to miss out on the final push but at the same time you wish to protect the gains you have made. That’s the backdrop for my fund picks for 2025 which I will be unveiling in the first week of the New Year. This is the last market update of 2024, so until then I wish you a peaceful break.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.