Summary
- The S&P 500 is overvalued and likely to see near a ’round trip’ in 2025.
- The Nasdaq 100 is a better index than the S&P 500, and investors should pay heed to the historical outperformance.
- Prediction is about the thought process of parsing out different scenarios, not about being stubborn.
- Reaction to whatever scenario plays out is key to managing risk and seeking excellent performance.
Last week, I did an in-depth discussion of factors and scenarios that could impact the economy and markets in 2025. I encourage you to read it for background.
Today’s piece discusses my base case for the stock market in 2025.
I am including both S&P 500 (SPX) and Nasdaq 100 (NDX) as I think there will be a significant divergence between the two again after a year that they hugged relatively closely.
The S&P 500 In 2025
Last year, I correctly predicted that the S&P 500 would have a monster up year when others were pessimistic.
My estimate of 5720 on the S&P 500 was the 2nd highest among Seeking Alpha analysts and far higher than most of the street. The following is from Charlie Bilello annotated by me.
Kirk vs Wall Street (Charlie Bilello)
For the coming year, as analysts and investment banks try to catch up by raising estimates, I am not so confident. My base for the S&P 500 in 2025 is that it rides a roller coaster and ends in about the same place as last year.
I believe that earnings will disappoint against raised estimates and that valuation will contract from historical highs.
FactSet Earnings Insight has analysts projecting 14.8% earnings growth for the S&P 500 in 2025. The odds of beating such a high set of estimates after a year that had earnings growth of 11.9% is almost nonsensical to me.
The 10-year average earnings growth rate has been 8% with much lower interest rates and QE (quantitative easing) fire hosed in from time to time.
That is not the backdrop we are in right now. The Fed, while lowering rates recently, is still engaged in QT (quantitative tightening) and rates are near 10-year highs on fears of resurgent inflation.
So, while I am high on many companies improving efficiency and margins over time because of AI, I think that process has just begun and bigger progress is another year or two out. Financial conditions are loose, but likely to get tighter before they get much looser again down the road (I think in 2026).
I am not sure how the waves in the curves will play out, but I expect the stock market to end the year a little bit to the downside.
It makes sense to me that we see a rally from Friday’s quadruple witching on options and futures into the January LEAPs expiration, but after that, all bets might be off.
The beginning of President Trump’s last term and the next Fed meeting loom large at the end of January.
Sometime after the January Effect has passed, I still see a very strong case for a 15-25% correction in the S&P 500 in 2025. But, then, as we creep closer to the enactment of Trump policies in 2026, and eventual lower interest rates and potential QE by 2026, I see a year-end rally.
Of course, if that’s not how it plays out, I will adjust. As I discuss with members of Fundamental Trends, making predictions is about parsing out scenarios. It is more important how we react as those scenarios play out.
My expectation is that S&P 500 earnings rise about $260, vs analyst projections around $280, and the P/E ratio comes back to 22 from the roughly current 30. That puts me at a 2025 year-end S&P 500 of 5720.
That is exactly what I predicted for 2024. In 2025, the S&P 500 at 5720 will be on disappointment versus euphoria.
The Nasdaq 100 In 2025
While the Magnificent 7 and Invesco QQQ ETF (QQQ) representing the Nasdaq 100 get a lot of press, there was not a lot of relative separation between QQQ and the S&P 500 ETFs (NYSEARCA:SPY) (VOO) in 2024.
SPY vs QQQ (Kirk Spano via TradingView)
QQQ outperformed SPY/VOO by about 2.7% in 2024 through last Friday. That is actually quite a bit, but relative to history, it is tight.
SPY vs QQQ 5-years TR (Kirk Spano via TradingView)
SPY vs QQQ To 2016 TR (Kirk Spano via TradingView)
SPY vs QQQ TR To Financial Crisis (Kirk Spano via TradingView)
SPY vs QQQ TR To Dot-com (Kirk Spano via TradingView)
As you can see, QQQ has outperformed SPY in every time frame, including from the Dot-com Crash. In fact, if you look at any 2-year or 3-year rolling time period, QQQ has beaten the total return of SPY.
Simply put, QQQ is a better index than SPY. Its volatility and risk has proven to be extremely similar, and the performance is higher. The very definition of superior.
In 2025, that outperformance could be on full display. While all risk assets fall during corrections with tightening liquidity (as discussed in the article I linked up top), coming out of a correction is where the outperformance can be seen.
I believe that QQQ is going to benefit from a few new additions, in particular MicroStrategy (MSTR) and Palantir (PLTR). These two companies, in addition to the rest of the Magnificent 7, could make up a newly named group coming out of whatever correction we see. Call them the Nifty Nine.
I am bullish on MicroStrategy as I believe Bitcoin (BTC-USD) is finding a counterparty role as an international currency hedge. If Bitcoin doubles or triples, which I think it will in the next few years, MicroStrategy will outperform as it is hedged in dollar denominated debt. Of course, on corrections, it could do worse, so, caution is advised.
I am bullish long-term on Palantir. It is a stock I bought in double digits and sold in the past couple months, causing me to miss the last portion of this run up. Again, I do see a correction coming, but Palantir is a great company that is about to start eating its shares in true Munger cannibal fashion.
Ultimately, though I see the S&P 500 down a few points in 2025, I see QQQ up a few points as the cumulative quality and ties to Bitcoin and AI pull it up. I expect the Nasdaq 100 to end the year at 22,000.
Investment Quick Take
Everyone has a prediction. So what.
What is important is the thought exercise in making predictions after assessing various scenarios. For investors, we can be stubborn, or, we can adjust to whichever scenario plays out.
When the facts change, I change my mind. What do you do, sir?” ~ John Maynard Keynes (who was a great investor)
While I expect a quick rally followed by softness and a correction, and then, a year-end rally, I will adjust to whatever the market throws at me.
I will continue to focus on great companies that the market gives me a chance to buy cheap from time to time, as well as, ETF investing that takes advantage of market rotations.
Finally, I will continue to use what has become an indispensable part of the tool kit: I will sell covered calls on overbought conditions and sell cash-secured puts on oversold conditions (using weekly, not daily charts). By using these tools to generate far more income than dividends ever could, I can increase my portfolio returns and manage risks incrementally for differing scenarios.
Kirk Spano
Founder | Head of Investment Research and Analysis