Executive Summary: Can the bull market continue to run despite high valuations, concentrated gains and lofty expectations? Of course. But diversification remains more crucial today than in years past as risks to tech giants loom. Bonds and cash can provide stability, but I’m still taking a safety-first approach to those markets. A prudent, diversified approach positions investors to weather uncertainties and seize opportunities.
But how do we know when irrational exuberance has unduly escalated asset values…?
― Alan Greenspan, The Challenge of Central Banking in a Democratic Society, Dec. 1996
With 500 Index (VFIAX) notching better than 25% returns in consecutive years—something that’s only happened on four other occasions over the past century—it’s safe to say we are in a bull market.
The question on most investors' lips is: Can the bull keep running?
The consensus response is yes. Consider that 56% of respondents to a survey by The Conference Board believe the stock market will be higher this time next year. That’s the highest positive response rate since 1988 (when this particular question was first asked). Even during the peak of the tech bubble, the positive response rate never crossed above 50%.
My response to the same query is a little more nuanced. As I’ve often said, my default setting is for stocks to gain ground. However, I’m leery of the AI-driven bull market and the giant tech stocks that dominate it. 2025 may very well be the year that diversification finally pays off!
All of that said, my outlook on the market hasn’t changed much from a year ago.
Look. It’s not easy to call a turning point in the market. Just ask former Federal Reserve Chairman Alan Greenspan, who gave his “irrational exuberance” speech questioning stock market valuations in late 1996 only to watch stocks gain 33%, 29% and 21% over the next three calendar years (1997–1999) before the bubble he was wary of finally burst.
Yes, I can imagine a 2025 where I’m wrong and the current market giants continue to drive returns. In that world, my Portfolios should deliver solid positive returns but will trail the 500 Index—much as they did the past two years.
So, let me present both arguments—reasons to be bullish and bearish on stocks in the year ahead—and tell you where I land. I’ll also share my view on the economy, bond markets and cash.
But before we look forward, as I do every year, let’s start by using history to guide my baseline assumptions.