This column is my opinion and expresses my views and should not be construed by any consumer and/or prospective client as solicitation to effect, or attempt to effect transactions in securities. Those views can change quickly when the market changes. I am not right all the time and I do not expect to be. I disclose all my positions clearly listed on the page.
As we enter 2025, I’d like to share a few predictions about the market dynamics this year. Please remember, these are personal insights, and I’ve been proven wrong at least once in every prediction I’ve made in the past, so take them with a grain of salt. I am not suggesting any securities or specific investments.
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A Year of Volatile Interest Rates
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Expect 2025 to be a year marked by significant volatility in interest rates. 2024 was a roller coaster ride with rates. With inflationary pressures still lingering, central banks across the globe will likely remain on edge. The Federal Reserve may continue its cautious balancing act of adjusting rates to contain inflation while preventing a slowdown in economic growth. Already we see long term bonds breaking down. There seems to be support at $85, but if we break through that level, we could reach 2023 lows. The economic data recently has restocked inflation fears as the ISM number was much higher than expected. The market at one point this week priced in a rate hike!
The volatility extends to foreign markets as well. Interest rates are behaving intriguingly in global markets, especially in the UK and Japan. Today, the 30-year UK bond yield surged nearly 13 basis points, climbing to 5.37%, breaking out of an ascending triangle pattern. The UK 10-year yield also hit its highest level since July 2008. Similarly, the British 2-year yield rose six basis points, reaching levels not seen since April 2024. These developments signal potential shifts in the broader interest rate environment, reflecting growing market expectations and economic pressures.
I personally think bonds will move much lower in the short term before rebounding, which make for another wild year for the bond market.
2. 2025 will be a disappointing year for Nvidia
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Out of my three predictions I believe this has the best chance of being wrong. Let me be clear, I do not think the stock will fall be 50% or some astonishing amount. However, the expectations for Nivida are so high that even if they do well it may not be good enough to move the stock higher. Nvidia's stock has reached astronomical levels in recent months, driven by excitement over AI applications and the growing demand for its GPUs. However, this surge in stock price has led to an inflated valuation, especially when compared to its historical averages. As of early 2025, Nvidia's P/E ratio is significantly higher than the broader semiconductor industry and the market, suggesting that the stock is priced for perfection. In one year, the price moved over 200%. At some point all good stories slow down.
While Nvidia has delivered strong revenue growth and profitability, its stock price has grown at an even faster pace. This raises concerns about the sustainability of its valuation, especially when comparing the company’s earnings growth to its stock price growth.
Historically, Nvidia’s stock price has tended to overshoot during periods of investor enthusiasm, often outpacing earnings growth. If Nvidia's growth slows down or if the broader market corrects, the stock could face significant downward pressure, especially considering its high valuation.
3. The stock market will underperform.
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It seems to follow if the first two point happen the market will most likely underperform this year. However, I think there are more reasons why the market will be a disappointment. As I have pointed out in my previous posts this market is one of the most expensive markets in the past 30 years. Price to sales, price to book, and price to earnings metrics show the market is overpriced. The Shiller P/E ratio hasn’t seen levels like this since the dotcom bubble in 2000.
With the change of administration there should be concern about how Trump’s tariffs will affect the economy. However, I do believe that story is getting overplayed. The larger concern, at least for the markets, is how will all his spending cuts affect the economy. I believe Elon Musk will do what he says as head of the new DOGE department. This will probably lead to lower government spending which will be beneficial in the long run but could hurt in the short-term.
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The market has a lot of hype around Trump taking office because his administration is very probusiness. It was a similar situation in 1981 when Regan took office. Regan’s first year however, the stock market greatly underperformed. Obviously, the following years started a long bull market, but it took some time for dynamics to adjust. I believe we could see something similar in Trump’s first year.
For the S&P, the critical support level to watch is 5875. A breach below this could pave the way for a move toward filling the gap at 5785, with the possibility of further declines. If the breakdown continues, we may be looking at the formation of a head-and-shoulders pattern and a rising wedge.
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Reflecting on the past year, financial conditions were more accommodative than I initially expected, despite rising interest rates and a stronger dollar. The key factor was that credit spreads did not widen as anticipated; instead, they continued to tighten, supporting multiple expansion and driving stock prices higher.
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Looking ahead to 2025, the pressing question is how long this trend can continue. If the dollar maintains its upward trajectory and the 10-2 spread continues to widen, the narrowing of credit spreads in the high-yield sector is unlikely to persist.
This page contains independent commentary to be used for informational and educational purposes only. Joshua Pilgreen is President and an investment adviser representative with Arbor Portfolio Management. Mr. Pilgreen is not affiliated with any company and does not serve on the board of any related company that was mentioned in the commentary. All opinions and analyses presented by Joshua Pilgreen in this analysis or market report are solely Joshua Pilgreen’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Joshua Pilgreen as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Joshua Pilgreen’s analyses are based upon information and independent research that he considers reliable, but neither Joshua Pilgreen nor Arbor Portfolio Management guarantees its completeness or accuracy, and it should not be relied upon as such. Neither Joshua Pilgreen nor Arbor Portfolio Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you.
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