Examine the risks that could undermine the stock market
As the 2025 New Year's excitement ends, look for the U.S. stock market to falter. It is carrying a lopsided enthusiasm from 2024, so 2025 could be a period of adjustment.
There are eight issues that have begun to undermine the stock market's shaky support:
First, the stock market rise has outstripped company earnings and other fundamentals (see graph at end of article)
Second, the bond market is staging a capital market break from the Federal Reserve's questionable attempt to cut all interest rates again
Third, inflation's flame is not extinguished, so watch for the seasonal first quarter relaunch of higher pricing. Also, do not forget to add in the potential tariff-driven price rises.
Fourth, homebuilder stocks have begun dropping. The overoptimistic managements are now confronted with unusually large inventories of unsold homes
Fifth, the U.S. government's skewed finances need fixing, but the recent House problems dealing with the debt limit show getting consensus will be difficult
Sixth, wars. In the U.S., wars abroad can be upsetting, but not distressing until something close at hand happens. When it does, people become worried or frightened, causing optimism to evaporate.
Seventh, climate change. The adverse effects are visible, so now what? Who is going to pay for repair, rebuilding, relief, and relocation. What preventive measures will be taken, and who decides them and carries them out?
Eighth, hubris (excessive pride or self-confidence). President Trump exudes this characteristic, meaning his major attempts to disrupt or reconstruct will likely result in unwanted and destructive counter-reactions - the effect of the law of "unforeseen consequences."
The bottom line - It is time for more than an optimism adjustment
The issues facing the U.S. are fundamental, well beyond those that the stock market typically deals with. However, the stock market's behavior eventually reflects those fundamental issues and affects investor temperament. Therefore, the stock market's happy 2024 end could run into a serious downside adjustment beginning in early 2025.
As mentioned in “first,” here is the almost 5-year Covid period graph that shows two major fundamental issues: the earnings lag and the inflation-adjusted reality. Both have real negatives that support a troubled stock market outlook.
Note earnings lag and negative real bond returns
