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Wall Street offered a solid performance in the past three months. The S&P 500-based exchange-traded fund (ETF) SPY added 4%, QQQ returned 7% and DIA added 1.8% in the past three months (as of Jan. 7, 2025).
In early December, the S&P 500 reached 6,100 for the first time, while the tech-focused Nasdaq surpassed the 20,000-mark. The Dow Jones also hit a historic milestone, crossing 45,000 before experiencing a sharp decline.
Notably, the Dow Jones recorded its worst losing streak in nearly 50 years, dropping 5.3% during December. Fed rate cuts, optimism around corporate growth under President-elect Donald Trump, and a resurgence in tech stocks were key drivers of the market's upward momentum.
Expectations from a Second Trump Administration
The market anticipates that a second Trump administration will support stock growth through its market-friendly policies. Proposals to restrict illegal immigration, impose new tariffs, lower taxes, and reduce regulations are expected to stimulate economic activity. However, these policies could also accelerate inflation, potentially constraining the Fed's ability to further reduce interest rates.
Federal Reserve's Stance on Rate Cuts
Amid a robust labor market and persistent inflation, the Fed projects only two rate cuts in 2025, down from the four anticipated in September. This cautious approach reflects the central bank’s balancing act to maintain economic stability. Lower interest rates typically reduce borrowing costs, enabling businesses to expand operations more easily. This enhanced profitability drives economic growth and provides a significant boost to the stock market.
Winning Sectors of the Past Three Months
Against the above-mentioned backdrop, below we highlight the winning sectors over the past three months and their top ETFs (the average three-month data are as per etfdb).
Consumer Discretionary – Average three-month return 14.21%
Roundhill Video Games ETF NERD has garnered 15.73% in this category. The global games market is projected to grow to an impressive $211 billion by 2025, as quoted on roundhillinvestments.com. Since 2020, over 12 out of 17 mega deals in the gaming industry have been valued at over $1 billion. The underlying Nasdaq CTA Global Video Games Software Index of the ETF NERD tracks the performance of exchange-listed companies engaged in video game publishing and video game development. The ETF charges 50 bps in fees and yields 1.68% annually.
Financials – Average three-month return 8.40%
Amplify Digital Payments ETF IPAY added 14.7% in the category. Global mobile payment market size was valued at $2.98 trillion in 2023 and is projected to grow from $3.84 trillion in 2024 to $27.81 trillion by 2032, a CAGR of 28.1%, as quoted on amplifyetfs.com.