Ship Is Solid, Steady As She Goes

By Kostya Etus, CFA®, Chief Investment Officer, Dynamic Investment Management

We had quite a bit of excitement over the last couple weeks. First, the market, as measured by the S&P 500, reached new all-time highs after the presidential inauguration and optimism for new policy. Next, news of a cheaper, China-based artificial intelligence model, DeepSeek, caused a stir in the markets and microchip giant NVIDIA tumbled 17% in one day. With nearly a 7% weight in the S&P 500 prior to the drop, NVIDIA was single-handedly responsible for more than 1% of the drop in the market. This reinforces the benefits of diversification and highlights the risks currently embedded in U.S. large-cap stocks. Lastly, a lot of new tariffs were announced which resulted in whipsawed market reactions around the world.

But despite the market volatility and noise from media outlets, the S&P 500 is still positive on the year. Additionally, several tailwinds emerged which flew under the radar. Here are the highlights:

• Economy and Inflation Steady. The core Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s (Fed) preferred inflation gauge, held steady at 2.8% for December, in line with estimates. Meanwhile, fourth quarter gross domestic product (GDP), the primary measure of U.S. economic growth, increased at an annualized 2.3% growth rate in the fourth quarter 2024. This puts the total growth rate for 2024 at 2.8%, slightly lower than the 2.9% we saw in 2023.
• Fed Holds Steady. The Fed left interest rates unchanged at their last meeting but did cite that “the unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid.” While the Fed takes a more patient approach to interest rate policy, we continue to see stability in core inflation and economic growth (as discussed above).
• Earnings Steady. Earnings continue to roll in favorably. According to FactSet, of the 36% of S&P 500 companies which have reported earnings through the end of January, 77% have reported an earnings surprise. The current earnings growth rate for the fourth quarter sits at 13.2% which if realized, would be the highest rate since 2021.

While there may be rough seas ahead, it appears we are sailing on a steady ship with tailwinds at our back, steady as she goes.

What will the market return this year?

When talking about stock market returns, you often hear about the average historic market return of about 8% to 12%, depending on the period. We also often hear that market pullbacks of 10% are normal and happen frequently. But how often is an annual return between positive 10% and negative 10%?

If you look at analyst forecasts, you will think it could happen every year, but how does reality differ? Let’s look at the last five years of actual returns compared to analyst estimates to get a gauge of accuracy:

• Analysts are Stable. Analysts tend to be conservative in their estimates. They roughly range between -10% and +10% and the median average to mid-single digits. Analysts tend to stick close to historic averages; they rarely go out on a limb to forecast extremes too far from zero. Kudos to the one analyst who got it right in 2023, although the one that projected less than -10% that year may have lost their job.
• Markets are Volatile. The reality is that annual market returns rarely end up in that 8-12% historic range or anywhere close to +/-10%. And just when you get comfortable with a couple years of around 20% growth, you get knocked back down with a vengeance. Even choosing the direction of the market on a consistent basis may be difficult.
• Staying Invested and Diversified is Key. This graph reminds me of a great quote from the movie, “The Wolf of Wall Street”:

“Number one rule on Wall Street. Nobody, and I don’t care if you’re Warren Buffet or if you’re Jimmy Buffet, nobody knows if a stock is going to go up, down, sideways, or in circles.”

The reality is we never know where the market will end up in a given year or how it will get there, and the best chances for investor success lie in staying diversified and invested for the long-term.

Stay diversified, my friends.

 

Annual Market Return Forecasts vs. Reality
Equity Analyst Predictions vs. Actual for S&P 500 Index Calendar Year Price Returns 2020-2024

 

Based on S&P 500 Index average annual total return from 1927-2024.

Source: Dimensional Fund Advisors (DFA) publication of Quarterly Stories 4^th Quarter 2024. Bloomberg, using the “Strategists S&P 500 Index Estimates for Year-End…”. Analyst predictions for each year are as of December in the year prior. Analyst forecasts and returns are price returns. There were 21 predictions for 2020, 17 for 2021, 19 for 2022, 22 for 2023, and 19 for 2024. Price return represents the change in price of an investment and does not include dividends and other earnings. S&P data © 2025 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Past performance is not a guarantee of future results. In USD. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

As always, we recommend staying balanced, diversified and invested. Despite short-term market pullbacks, it’s more important than ever to focus on the long-term, improving the chances for investors to reach their goals.