The Daily Breakdown looks at what 2025 could have in store for AI stocks, small caps and the eventual pullbacks in the stock market.
Friday’s TLDR
- Can bulls maintain momentum?
- Remember, pullbacks are normal
- Apple dips toward potential support
The Bottom Line + Daily Breakdown
2024 was a year for the books. While the S&P 500 churned out a similar performance to 2023 (up 23.3% last year vs. 24.2% in 2023), the index was able to smash through its prior all-time high set in January 2022 and recorded more than 50 new record highs throughout the year.
However, we’re turning the page to 2025 at an interesting time. The stock market rode a multi-day losing streak into the new year and in a few weeks, a new administration will take over in Washington.
Naturally, it has us pondering a few thoughts for next year.
The Big Picture and Pullbacks
We enter 2025 firmly in a bull market. The jobs market is on solid footing and the economy is humming along. Interest rates are expected to move lower next year, while analysts expect double-digit earnings growth for the S&P 500 in 2025 (and 2026 for that matter too).
These are the building blocks — the fundamentals — to the bull market right now. If they deteriorate, stocks likely will too. If they stay strong (or improve) then markets have the runway to continue doing well, even if sentiment is overwhelmingly negative right now.
While the backdrop is positive, markets are prone to corrections.
Going back to 1974, the S&P 500 has averaged three corrections of 5% or more per year, with the average intra-year correction weighing in at ~14%. We didn’t get a 14% correction in 2023 or 2024. However, we had three corrections between 9% to 11% in the last two years.
I don’t know if we’ll get another ~10% correction this year or if we’ll get something closer to the average (~14%) — or something bigger. But unless we see a big shift in the fundamentals, notable pullbacks in 2025 are likely an opportunity for investors.
AI Remains a Powerful Theme
Nvidia had another powerful year, but we’ve seen some bifurcation in the chip space. The “haves” like Nvidia, Broadcom, and Taiwan Semiconductor separated themselves from the “have-nots” like Advanced Micro Devices, Intel, ASML, and others.
It remains to be seen if some of these laggards can make up the ground they lost in 2024. However, we could see other AI plays start to come to life, including stocks in the software and cybersecurity space.
Recently, stocks like Snowflake, Salesforce, Palantir, and Datadog have had strong momentum thanks in part to AI. Can they and others carry that momentum throughout 2025?
Small Caps
We’ve talked on and off about small caps throughout 2024 and that’s because they’ve been “hot and cold,” with big monthly rips — the Russell 2000 has had three months with 10% gains in the last 13 months — followed by lackluster action.
At one point, the Russell was up about 22% in 2024, but a big stumble in December knocked its return down to just 10% for the year — last among the four big US indices.
However, analysts remain optimistic, with some consensus expectations calling for 40% earnings growth this year. Will strong growth and lower interest rates propel this group higher?
The Russell 2000 hasn’t beat the S&P 500 since 2020 and has only beat the index twice in the last decade. Will 2025 be different?
The Bottom Line: No one knows how 2025 will play out. The analysts are positive, while investors are fairly downbeat at the moment. We’ll surely have some bumps and bruises — we always do — but so long as the big picture remains intact, bulls get the benefit of the doubt.
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The setup — Apple
A favorite for many investors, Apple is starting off 2025 on the wrong foot. Riding a four-day losing streak, some bulls are keeping a very close eye on the charts.
That’s as Apple pulls back toward $237. This level marked the high in July and was resistance again in October before AAPL finally broke out over this level in early December.
A dip to this area not only puts a key retest in play, but also brings the 50-day moving average into the fold. For bulls, they’ll want to see this area hold, ushering in a potential “buy the dip” opportunity.
Options
For options traders, calls or bull call spreads could be one way to speculate on support holding once it’s tested. In this scenario, buyers of calls or call spreads limit their risk to the price paid for the calls or call spreads, while trying to capitalize on a bounce in the stock.
Conversely, investors who expect support to fail could speculate with puts or put spreads.
For those looking to learn more about options, consider visiting the eToro Academy.
Disclaimer:
Please note that due to market volatility, some of the prices may have already been reached and scenarios played out.
