The 2022 stock market correction created countless buying opportunities for contrarian investors. While the British stock market proved fairly resilient, US stocks weren’t so fortunate.
But as most were panicking, these long-term-minded individuals were able to snap up terrific companies at dirt cheap prices. And today, they’re laughing with plenty of top-notch stocks already up by triple digits from their correction lows.
Capitalising on recovery tailwinds is a proven tactic for unlocking market-beating returns. It’s why these last few years have been some of my most active buying periods. And with the US stock market finally delivering the long-anticipated bounce-back, my portfolios have thrived in 2024.
However, this upward trajectory may be far from finished. And the recovery could continue throughout 2025.
A once-in-a-decade chance?
Small market corrections are fairly common and usually occur once every three years. However, severe prolonged adjustments to stock prices, like in 2022, are far more unusual. In fact, if we exclude the two-month-long Covid crash in 2020, there hasn’t been a major market downturn since the 2008 financial crisis.
That’s because, while there have been a few shake-ups, the economic environment was relatively stable before returning to steady growth with lower interest rates. This is also why 2025 looks so promising. With inflation now under control, both the US and UK central banks have switched back to expansive monetary policy, with the governments following suit.
Lower interest rates mean lower pressure on consumers and more capital available for businesses. And now that all the political uncertainty in the UK and US has cleared up, the stock market looks primed to thrive as we enter what could be another decade of economic prosperity.
Stock markets are forward-thinking
This positive outlook is quite a glass-half-full take on the trajectory of UK and US shares. However, not everyone’s in agreement. And to be fair, there is some justified cause for concern.
It’s important to remember that investors value businesses based on their future potential. As such, there’s a good chance that the expected returns from interest rate cuts in 2025 are already baked into valuations today. And given that some stocks, especially AI-focused enterprises, are now trading at lofty multiples, investor expectations could be a bit overzealous.
Take The Trade Desk (NASDAQ:TTD) as an example. Right now, the shares are trading at a price-to-earnings (P/E) ratio of 190! To be fair, the digital advertising giant’s dominated its industry, achieving jaw-dropping revenue growth while enticing customers to keep allocating more of their marketing budgets to the Trade Desk platform.
For reference, over the last five years, sales and operating profits have grown by an average annualised rate of 31% and 38% respectively.
However, even on a forward basis, the P/E ratio’s still a whopping 88.5, making the valuation hard to justify. Even more so, considering 2025 will have some tough comparables to beat against the 2024 election year, where political ad spending went through the roof.
While there are some lofty premiums floating about, I remain optimistic that 2025 will be another lucrative year for the stock market. But regardless of whether stocks rise or fall, for investors who want to maximise returns, it’s the undervalued companies that could deliver the greatest returns.
