2024 for equity markets was nothing short of fantastic, with the S&P 500 posting a 25%+ gain. We now have had back-to-back 20%+ year returns in the S&P 500 Index. This is a rare and fantastic development, but it bolds the question:  can it continue?  When will the pullback happen?

For 2025, we remain bullish, but we are cautious bulls. There is an elevated level of froth and speculation in various segments of the financial markets. As an example, there are now literally dozens of cryptocurrencies – beyond Bitcoin – that have market caps in excess of $1 billion.  To put that in perspective, these billion-dollar cryptocurrencies have a larger market value than 75% of U.S. listed stocks!  Furthermore, there are a number of unprofitable companies that generated spectacular returns in 2024.

In a market where having no earnings or dividends seemed to actually help a company’s stock price, we believe in 2025 we will see a reversion away from the speculative technology/cryptocurrency boom and a “back to the basics” theme of investing in quality, income, and defensive growth. Here are some of our thoughts and ideas for 2025:

Dividends will work.

As far as we’re concerned, dividends are always in vogue.  In an environment with lower interest rates, higher volatility, and stable taxes (which we foresee in 2025), dividend stocks can shine.  Consider both individual stocks and ETFs that offer a higher yield than the S&P 500, and watch your dividends roll in.

Well Known Healthcare Stocks Are a Buy

Healthcare stocks have lagged the broad market for over two years now, due to populist political concerns and the simple fact that investors have sought more speculative fare.  Merck, Abbvie, and Johnson and Johnson all yield over 3% and generate solid earnings growth of about 5% per year. These stocks offer the rare combination of solid growth and defensive positioning if equities take a nasty turn. With the market at or near all-time highs, we believe these healthcare stocks are a bargain.

Take the Contrarian View.

Until the last ten or so years, international stocks were an excellent diversifier for any portfolio and generated comparable results to the U.S. stock market. However, foreign equities have dramatically lagged U.S. stocks for quite some time.

As any great investor will tell you, the best time to buy a quality asset is when no one wants it.  In the financial media today, everyone seems to believe that U.S. stocks will be the only game in town.  This is the overwhelming consensus view and is probably a good contrarian signal that international equities may be primed to surprise and shine in 2025.

The Magnificent Seven?

Over the last six years or so, the mega-cap technology stocks, otherwise known as the “Magnificent Seven” have generated massive returns, and become over 40% of the weight of the S&P 500 alone.  Assuming you’ve purchased at least a few of them, we would continue to hold them. If a stock becomes over say 12% of your portfolio, you may consider trimming back below that level, especially in tax-advantaged accounts.  But in our view, these are the very best, highest-quality growth stocks in the world.  In fact, when markets have had weak periods, investors actually flock to these names due to their low debt and incredible cash flow generation.  Continue to hold, but if you don’t own any of them, look for pullbacks to buy.  These are great companies.

Keep Politics Out of Your Portfolio

November was a great month for stocks, up over 5% following the uncontested election of Donald Trump.  However, making investments based on political trends or proposals should be avoided.  No question, deregulation and generally lower taxes is a boon for equity investors – higher tariffs less so. Keep in mind, however, that stocks, overall, have been excellent wealth creators over the last three administrations – all of which have had very divergent political philosophies.

This is no time to join the speculative crowd.  As Warren Buffet would say “Be fearful when others are greedy and greedy when others are fearful.”

Caveat emptor.