Index Fever: The Results from 2024 and Prospects for 2025

Many investment retirement and savings accounts invest in ETFs and other market products that follow the leading U.S. equity indices. The four leading U.S. stock market indices, the diversified S&P 500, the DJIA, the tech-heavy NASDAQ Composite, and the small-cap Russell 2000 posted gains in Q4 and 2024.

There tends to be an inverse relationship between bonds and stocks. When bonds decline, interest rates increase, attracting capital to flow from stocks to bonds and fixed-income assets at higher interest rates. However, the decline in bonds in 2024 did not stop the leading stock market indices from posting significant double-digit percentage gains. While the Fed cut short-term interest rates by a full one percent from the high, medium and long-term interest rates remain high. The U.S. deficit at over $36.346 trillion has kept interest rates high as the swollen debt weighs on the full faith and credit in U.S. government debt securities.

The four leading stock market indices post Q4 2024 gains

• The bellwether DJIA edged 0.51% higher in Q4.
• The most diversified S&P 500 index moved 2.07% higher in Q4.
• The tech-heavy NASDAQ moved 6.17% higher in Q4.
• The small-cap Russell 2000 edged 0.03% higher in Q4.

The indices moved higher in 2024

• The DJIA posted a 12.88% gain in 2024.
• The S&P 500 moved 23.31% higher in 2024.
• The NASDAQ composite gained 28.64% in 2024.
• The Russell 2000 moved 10.09% higher in 2024. 

Bonds declined even though short-term rates moved lower

• Stocks rallied despite the price action in long-term interest rates in 2024.
• While the Fed cut the short-term Fed Funds Rate by 100 basis points, the U.S. 30-year Treasury Bond futures fell 8.42% in Q4 and was 8.65% lower in 2024.
• While rising interest rates tend to attract capital from equities to fixed-income assets, stocks rallied in Q4 and 2024 despite the higher long-term interest rate environment.

The factors that support stocks in 2025

• Lower corporate taxes under the Trump administration could support earnings and stock prices in 2025.
• The potential for less geopolitical turmoil under the incoming administration could increase investor confidence, pushing stocks higher.
• Less regulation under the new administration tends to be bullish for stocks.
• Lower energy prices could cause the cost of goods sold for goods and services, increasing corporate profits and pushing stocks higher.

The factors that could cause a stock market correction in 2025

• The world remains a geopolitical tinderbox that could cause negative surprises that lead to selling in the stock market.
• Tariffs could impede global trade, leading to economic woes for multinational companies.
• At record highs, the leading indices could experience significant corrections.

After posting double-digit percentage gains, the leading stock market indices enter 2025 near record highs. In mid-January, the indices have corrected lower from the 2024 closing levels. Even the most aggressive bull markets rarely move in straight lines.

At the current levels, hedging risk in long-term investment accounts for those who depend on near-term withdrawals could be optimal. However, any significant corrections could be golden buying opportunities for investors with longer-term horizons.