For Wall Street, 2024 was a year that defied expectations, broke records and hinted at an optimistic future. Though the year began with uncertainty, the Nasdaq Composite, the S&P 500 and Dow Jones surged to remarkable heights. Tech stocks drove much of the rally, with the Nasdaq climbing over 28.6%, the S&P 500 up 23.3%, and the more conservative Dow Jones rising 12.9%.
At the heart of the rally were the “Magnificent Seven” tech giants and the artificial intelligence (AI) boom. NVIDIA dazzled with a jaw-dropping 175% gain, riding the AI wave, while Tesla, Amazon, Alphabet and Meta all posted gains of more than 30%. Yet, the rally wasn’t limited to these tech behemoths. Earnings growth was spread across sectors, signaling a broadening market rally.
Historic Presidential Election Impacts Markets
Donald Trump defeated Vice President Kamala Harris after President Joe Biden withdrew just three months before Election Day. Trump’s victory initially spurred a rally in small-cap stocks, though the gains later faded.
Energy and financials rose briefly, driven by expectations of deregulation and mergers. Meanwhile, Bitcoin soared over 110%, hitting all-time highs after Trump pledged supportive cryptocurrency policies (read: 2025 Looks Bright for Bitcoin: ETFs Ready to Gain Big).
U.S. Economic Resilience
The U.S. economy proved its strength. Retail sales exceeded expectations, GDP growth remained robust, and unemployment hovered at a steady 4%. While inflation remained a concern, it gradually moved closer to the Federal Reserve’s 2% target. The Bloomberg Dollar Spot Index marked its best year since 2015 due to the Trump rally and the Fed’s less dovish policy pivot (read: ETFs to Benefit From Dollar's Best Year in a Decade).
Fed Walks a Tightrope
The Federal Reserve faced the critical task of managing inflation and maintaining economic growth. In 2024, it cut interest rates by 100 basis points, signaling a cautious easing cycle. By the year end, the Fed projected a more gradual approach for 2025, with two additional cuts expected.
Inflation, while moderating, remained a key challenge. Core inflation readings topped expectations late in the year. Inflation is likely to go higher in 2025 fueled by speculation about Trump administration policies such as high tariffs and immigration restrictions. These concerns kept both the markets and the Fed on alert.
Looking Ahead to 2025
As 2024 drew to a close, strategists painted a mostly positive picture for 2025. The S&P 500’s median target of 6,600 represented an 12% increase, with some projections as high as 7,100.
Against this backdrop, below, we make six predictions for the exchange-traded fund (ETF) space for 2025.
A Strong Year for Equities
The S&P 500 has experienced a remarkable bull market this year, thanks to the AI boom, Fed rate cuts, and Trump trade. However, the probability of high inflation and an economic slowdown is high.
BMO Capital and Morgan Stanley indicated that after two years of annual gains topping 20% for the S&P 500, a moderate performance is expected in 2025 (read: What Lies Ahead for S&P 500 ETFs in 2025?).
But overall, Wall Street should be in great shape in 2025 due to economic and corporate resilience. The S&P 500 ETF SPY has a Zacks Rank #2 (Buy) (read: Can S&P 500 Fall in 2025? ETFs to Rescue You).
AI Will Keep Ruling
The AI boom will continue to fuel the rally in the broader equity market, with companies investing huge sums in the technology sector and beyond. The generative AI market is poised to explode, seeing a CAGR of 42% to $1.3 trillion over the next 10 years from a market size of just $40 billion in 2022, according to a new report by Bloomberg Intelligence.
The growing demand for generative AI products is expected to generate approximately $280 billion in new software revenues, thanks to the rise of specialized assistants, innovative infrastructure products, and coding copilots.
Companies such as Amazon Web Services, Microsoft, Google and NVIDIA are likely to be big beneficiaries as businesses increasingly transition their workloads to the public cloud. Roundhill Magnificent Seven ETF MAGS is likely to do well. Also, with the AI boom spreading into other areas, power utility ETFs like XLU and software ETFs like XSW should also do well in 2025.
Go for Blend – A Mix of Growth & Value – Stocks
The Fed has enacted 100 bps rate cuts this year and hinted at a hawkish view next year. As of now, the Fed is likely to cut rates twice in 2025. Such a scenario should keep rates higher and favor value stocks. But then, economic resilience and the AI boom keep bolstering growth stocks, too. To enjoy the best of both worlds, investors can choose a blend of both value and growth stocks. Invesco S&P 500 Top 50 ETF XLG, iShares S&P 100 ETF OEF and Vanguard Mid-Cap ETF VO are some of the ETFs investors can keep a close tab on.
Tesla to Ride High
Tesla TSLA stock is up 62.6% in 2024. The electric car maker has advanced 92% over the past six months, with the rally pronounced since President-elect Donald Trump's victory. Analysts are optimistic about the potential benefits of federal deregulation for Tesla, which derives 33% of its valuation from the AV business. Deregulation could streamline the approval process for Tesla’s full self-driving (FSD) software and Robotaxi services.
Also, Musk’s emerging political presence might extend Tesla’s influence beyond the automotive industry. Trump named Elon Musk to lead a panel on government efficiency. Tesla-heavy ETFs include Nightview Fund NITE and Simplify Volt TSLA Revolution ETF VCAR (read: Tesla Stock Hits All-Time High: ETFs to Ride the Momentum).
Go for Gold
Since 2025 may also bring uncertainties in the form of tariff war, inflation spike and Fed policy, diversification is needed. Gold is a good play in this regard. SPDR Gold Trust GLD gained about 27% in 2024. Any disruptions should boost the price of gold even further.
China to Sizzle Again?
Chinese stocks have been under pressure for quite some now for one reason or the other, with the real estate crisis hogging the most attention. Still, iShares China Large-Cap ETF FXI is up 31.2% so far this year (as of Dec. 30, 2024). Chinese stocks, in fact, recorded their first annual gain following a three-year decline.
Several supportive measures announced during the second half of 2024, which targeted monetary policy, the property market, and capital markets, largely surpassed expectations and made up for ongoing economic concerns. These factors should shore up the Chinese economy more in 2025 and put the countries’ stocks in a sweet spot.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
