The stock market has been on quite a roll so far in 2024. Here in the UK, the FTSE 100 and FTSE 250 have delivered double-digit total returns, while across the pond in the US, the S&P 500 is up over 20% since January!
This explosive rebound in performance is hardly a surprise. After all, we’ve just come out of a pretty severe market correction. And the stock market has historically always delivered impressive growth when starting from a low base. However, looking at the macroeconomic landscape, the growth seen today may be just the tip of the iceberg.
There are a lot of encouraging trends that could make 2025 an exciting year for investors. So, let’s take a look at what could send stock prices skyrocketing next year, as well as what could go wrong.
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The bull case
With inflation largely back under control, central banks like the Bank of England and the US Federal Reserve have finally begun cutting interest rates. While that does mean savings accounts won’t be as lucrative, it also decreases the cost of debt. That makes mortgages as well as business loans more affordable, helping spark economic growth.
For many businesses, this is wonderful news, even for those with no debt on their balance sheets, like Somero Enterprises (LSE:SOM).
The company has suffered a significant slowdown in demand for its concrete-laying screed machines for construction projects, particularly in the US. It seems that most of its customers are delaying projects in anticipation of lower interest rates next year.
While it’s certainly frustrating to see growth slow in the near term, it’s exciting to see explosive potential just around the corner. A rebound in inflation would obviously delay this expected comeback, and it’s a risk that Somero is currently contending with. However, management has a fairly extensive history of dealing with the cyclicality of the construction sector, giving me cautious optimism.
Beyond interest rates, continuous innovation in the technology sector also holds promise. While AI spending has arguably gotten out of hand, current consensus expects to see early signs of margin expansion and improved efficiency as AI-powered solutions are deployed throughout various business models. And when pairing higher economic growth with increasing profitability, the result is a powerful stock market catalyst.
What could go wrong?
Just as there are lots of things to be excited about, there are quite a few concerns brewing as well. We can’t ignore the escalating conflicts plaguing Eastern Europe and the Middle East. After all, both tragic wars have already adversely impacted global supply chains and created enormous shipment delays.
In the meantime, the political uncertainty of the upcoming US election is also creating concern relating to economic policy. The threat of widespread global tariffs could trigger a new round of US inflation, while higher corporation taxes could significantly negatively impact business earnings.
The bottom line
It’s impossible to know for certain what’s going to happen over the next 12 months. Personally, I wouldn’t be surprised to continue seeing volatility in the stock market moving forward. But despite the short-term hurdles, high-quality companies should be able to adapt and thrive in the long run. That’s why, even with some justifiable concerns about the stock market, I’m feeling quite bullish right now.
