The S&P 500 index, which brings together the 500 leading publicly traded companies in the US, is currently going through a phase of consolidation and relatively increased volatility. After the end of the year and January’s underperformance, investors are trying to navigate the new conditions affecting global financial markets. Is now a good time to invest?
Stocks continue to fall at the start of 2025, and last week was a week of declines for the S&P 500 Index, with the index losing more than 2% even though the U.S. stock market was only open for four days. For many investors, such a drop right at the start of the year was a shock, as the first few weeks are said to reflect, though not guaranteed, how the markets will perform for the rest of the year. Yet 2024 was a year of strong growth, with stocks in the S&P 500 index posting a return of around 25%, building on the 26% performance in 2023.
One of the main catalysts for the current events was a statement by the US Federal Reserve (Fed) officials, who indicated that there would be smaller rate cuts in the future or that rates would be kept elevated for longer. Such a hawkish stance has translated into rising bond yields at the longer end of the yield curve, which generally reduces the attractiveness of the stock market. Indeed, high interest rates increase the cost of corporate financing and also encourage investors to shift some capital into less risky assets. If such a situation were to persist for a longer period of time, some companies could face a shortage of capital or rising costs.
At the same time, much of the current decline in the index stems from the fact that the S&P 500 index was technically overbought in previous months. That is, the price charts have moved significantly away from their moving averages as a result of the persistent growth, and therefore the market has been vulnerable to even slightly negative news. When the Fed signaled greater caution in monetary policy at the end of the year, the equity world reacted by taking profits and temporarily retreating from risk assets. The result has been volatile trading in a tighter range, with individual stock and index prices searching and waiting for fresh momentum.
From a macroeconomic point of view, many market participants are concerned about a possible slowdown in the economy, also in view of the new measures promised by the newly elected US President Donald Trump. Inflation, which, although slowly declining, is still well above the Fed’s 2% target, remains another concern. However, the data does not yet point to a dramatic drop in economic activity – rather, it suggests a milder slowdown, which reassures many investors that there is no reason to stress just yet.
What to expect from the S&P 500 index in 2025?
For strategically minded investors, the current situation may not be problematic. Rather, it may serve as a good opportunity to rebalance portfolios and buy quality stocks that have temporarily declined due to general market jitters. It is prudent to follow a policy of diversification, invest smaller amounts on a regular basis (Dollar-Cost Averaging) and have stop-loss orders in place to help limit potential losses. Although many are tempted to rely on the January indicators, they must realize that in reality many factors come into play, such as corporate earnings, inflation, interest rate trends and potential geopolitical events.
Overall, the S&P 500 is in a fragile state, with cautious optimism mixed with heightened risk, but despite short-term fluctuations, the medium- and long-term outlook for the index remains favorable, barring any unexpected events that would send the market into a more significant downturn. Wall Street analysts still expect another bullish year for stocks, but investors must overcome the psychological barrier of fear of losing money in the early months of the year.
