Market Forecast: A Shift in Momentum Ahead
As we head into 2025, renowned Wharton professor Jeremy Siegel predicts a significant slowdown in the S&P 500’s growth, with gains capped at a modest 10%. This marks a stark contrast to the benchmark’s impressive 26.5% surge so far this year, driven largely by the artificial intelligence frenzy and investor appetite for large-cap tech stocks.
Tech Giants May Lose Steam
Siegel believes that the dominant tech stocks, which have been the driving force behind the market’s recent success, may experience flat returns next year. This could be attributed to the fact that these high-flyers are starting to lag, making it challenging for the S&P 500 to replicate its impressive gains of the past two years.
Small-Caps Poised for a Breakout
However, Siegel is optimistic about the prospects of undervalued small- and mid-cap stocks, which he believes are ripe for a rally. With investors positioning themselves for domestic firms to benefit from deregulation and tax cuts, these overlooked assets may finally get their due attention. The small-cap Russell 2000 has already gained 7% since the November 5 election, hinting at a potential shift in momentum.
The Role of Bond Yields
Rising bond yields are likely to play a crucial role in shaping the market’s trajectory next year. As Bank of America notes, increasing rates could cap risk assets in 2025, further emphasizing the need for investors to diversify their portfolios.
A New Era for Small-Caps?
While some market observers remain skeptical about small-caps’ ability to sustain their recent gains, Siegel is convinced that these undervalued stocks are poised for a breakout. With the S&P 500’s reliance on tech stocks waning, small- and mid-caps may finally get their chance to shine. As Siegel puts it, “Maybe the Mag 7 will do nothing next year, and those small and mid-sized caps, stocks — which are really so undervalued compared to the others — are finally going to have their day in the sun.”
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