Bull or bear? Why 2025 could be the most divisive year in stock market history

Yogesh Prasad, CFA, CAIA

CEO and founder of Confluent Asset Manageemnt

As we head into 2025, it is time to pull out that old crystal ball and look hard at what might be in store for us in 2025. Pull up a cup of coffee-or maybe something a bit stronger-and let’s dig into some possible bull and bear scenarios that could mold the stock market in the next year.

The bullish bonanza: Why some think we're heading to the moon

Let’s start with the good news, shall we? There’s a pretty vocal crowd out there who thinks 2025 could be a banner year for stocks. And honestly, they’ve got some solid reasons to feel optimistic.

Economic Resilience

First, there’s the economy: for all the doom and gloom we’ve been hearing for the last couple of years, the U.S. economy has actually held up rather well. Unemployment is low, consumer spending continues to chug along, and inflation-while still a nuisance-apparently is finally cooling off. The assumption from all this, in some people’s minds, would be that this means companies will continue in their moneymaking ways and thus yield sweet stock gains.

Broader Market Participation

But here’s where things get really interesting. Remember how literally everyone and their grandmother talked about the “Magnificent 7” stocks throughout 2023 and into 2024? Well, some market gurus are gambling that 2025 will finally be the year the rest of the stock market wants in on the party: smaller companies, different sectors-basically, a broader rally that doesn’t just lean on a handful of tech giants.

Tech Breakthroughs

And then of course, there’s technology. Artificial intelligence, clean energy, biotech-these aren’t buzzwords anymore. These technologies are remaking whole industries and can send the profits-and stock prices-of those companies which harness them to the stratosphere. It’s like the dot-com boom, but with hopefully fewer pets dot coms.

Historical context

Gosh, I can just guess now: a few of you history majors are going to immediately say, “But wait, haven’t we been in a bull market for some time? This can’t last!” And rightfully so. But here’s the cool part: since 1926, the average length of these bull markets has been about 6.6 years in length and have returned, on aggregate, about 339% during said period. Bear markets tend to last more than a year and see losses of about 38%, so if one were to go by statistics, the bulls could have some legs.

The bear necessities: Why some are battening down the hatches

Now, let’s paint that rosy picture as to why some folks are feeling a bit grizzlier about 2025. Sorry, couldn’t resist the bear pun.

Valuation Concerns

First things first: valuations. Look, I’m not trying to be the wet blanket in the parade, but the fact of the matter is, stocks are pretty darn expensive these days. We’re talking total market cap of the S&P 500 sitting at about twice U.S. GDP. That said, historically that ratio was something closer to 0.75-1. What does this mean in plain English? Stocks might be overvalued, and that which rises has got to fall sooner or later.

Advisor Sentiment

And it’s not just me being a party pooper. A recent survey found that 80% of financial advisors-you know, the folks who do this for a living-expect to see at least a 10% drop in the S&P 500 during 2025. Some are even bracing for a full-on bear market. When the pros are nervous, it’s probably worth paying attention.

Inflation and Interest Rates

Then, of course, there is that dance between inflation and interest rates. Most of that’s cooled off, but what if it decided to rear its ugly head some time again? That would force the Fed to keep interest rates higher for longer. That hurts economic growth, and stocks aren’t as attractive anymore.

Geopolitical Risks

And then, of course, there is that wild card called geopolitics: tensions everywhere, never-ending trade disputes, and who knows what other curveballs the recent US election will throw our way. Any one of them can spook investors to sell their stocks.

Market Cycle Nature

And finally, I hate to be the harbinger of bad news-just can’t resist one more bear pun, I’m on a tear-but market cycles are a thing. We’ve had a pretty good run, and sometimes trees don’t grow to the sky. Even if we don’t see a full-on crash, we might be due for a period of lower returns or increased volatility.

So, what's an investor to do?

If your head is spinning after all that, don’t worry-you’re not alone. The truth is, nobody knows for sure what 2025 will bring. But that doesn’t mean we can’t be smart about how we approach it. Here are a few thoughts to chew on:

Diversification is Key

Diversify, diversify, diversify! Like a broken record, one of the best ways to still safeguard against market mood swings is to spread bets among a variety of investment types.

Focus on Quality Investments

It’s all about quality. Companies with solid fundamentals and good business models usually make it through the times of chaos in the economy rather well. Think less of “meme stocks” and more of “boring but reliable.”

Defensive Strategies

And, of course, there’s defense. If you’re worried about the potential for a slowdown, consider some defensive plays in your portfolio: Utilities, consumer staples-things people must have regardless of which way the economy is going.

Take a Long-Term View

Keep the long game in perspective. It is easy to get caught up in short-term market moves, but remember over the long haul, stocks always outperform other investments. Try not to let day-to-day fluctuations drive you crazy.

Stay Informed Without Obsessing

Stay informed but not obsessed. Keep your eye on economic indicators and market news, but don’t freak out over every headline that comes along. Often, the best investment strategy is to simply tune out the noise and stay with your plan.

The bottom line

Going into 2025, the stock market is one heck of a “choose your own adventure.” We could go for more growth-a function of this resilient economy and interesting new technologies coming down the road-or be at the receiving end of headwinds courtesy of really rich valuations, possibly renewed concerns over inflation, and other worldly uncertainties. That’s in a nutshell preparing for both scenarios.

It will really diversify, be invested in companies of substance, and be adopted for the long term. Thereby, the investor positions himself or herself to maximize such an availed opportunity while protecting the portfolio from potential downturns. Remember, investment is marathon rather than sprint! Whether 2025 is shaping up to be a year for the bulls or the bears, the best way to ensure long-term success is to stay even-keel and true to your well-considered strategy. And there you have it-your roadmap through the stock market waters in 2025! It’s going to be an interesting ride; keep your wits about you! Here’s to a prosperous-and hopefully not too crazy-year ahead!

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