Since the launch of ChatGPT at the end of 2022, the S&P 500 has been on a tear. With every other stock market, including the FTSE 100, left behind, Wall Street analysts expect 2025 to be another stellar year for the US. I, though, believe 2025 is likely to be a much tougher year for US index investors.
Concentration of stocks
One of the biggest risks for the S&P 500 in 2025 and beyond is extreme concentration. A few years ago, it was the FAANG stocks that were the darlings of the market. Today, it’s been rebranded as the Magnificent 7.
Call it what you like, but a stock market that is being propped up by just a handful of stocks makes no sense to me.
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On top of the concentration risk, is the fact that virtually everyone is on one side of the boat. Not only US investors have piled into the S&P 500 but so has the rest of the world.
Smart money is out
When individuals like Warren Buffett and Stan Druckenmiller start paring back or selling out completely from their mega-cap holdings, I simply can’t ignore that fact.
Buffett once famously described Apple as “probably the best business I know in the world”. But even a great company can become ridiculously overvalued.
Today, the earnings yield (the inverse of the price-to-earnings ratio) of the S&P 500 is lower than a risk-free 10-year treasury bond. The last time this happened was back in 2000, just before the dot.com bubble popped. To me, this fact pretty much sums up the level of complacency that is out there today.
FTSE 100 comeback
If the gloss starts to come off the Magnificent 7 in 2025, I don’t believe the index will go sideways. That is certainly not what happened in 2022.
I don’t doubt that if the S&P 500 falters that the contagion would likely initially spread to the FTSE 100. But I don’t think it will last.
If 2022 taught me anything it is that once investors have clambered for the exit, they then start hunting for cheap, safer plays. Packed with blue-chip companies at ridiculously low P/E multiples, many dishing out inflation-busting dividend yields, the FTSE 100 will be a natural choice.
One sector that is doing really well at the moment is financial services. The Barclays share price has doubled over the past 12 months. Despite this, it trades at forward P/E of just seven.
Insurance businesses also look cheap to me. Aviva’s 6.8% dividend yield, supported by long-term structural growth trends, make it a compelling investment to consider.
Then there are the oil stocks. The BP and Shell share prices have been weighed down by weak oil and gas prices throughout 2024. But this is beginning to reverse. And with a US president who supports the industry, I believe the upward trend will continue.
I don’t want to forget about the miners. As demand for electricity soars from the likes of data centres, EVs, and heat pumps, huge investments in grid infrastructure will be needed. Glencore and Anglo American have some of the best large-scale copper mines across the globe. Both of these stocks’ valuations don’t reflect their intrinsic value, in my opinion.
