Why A Major Market Reversal Is Likely Coming In 2025

2024 was a strong year for the S&P 500, driven by soaring crypto and big tech stocks. However, there are compelling reasons to believe a significant market reversal is likely in 2025. Here's an overview of the market dynamics and how we are positioning ourselves accordingly.

2024 Market Trends

The market in 2024 was defined by the continued AI boom, which propelled AI tech stocks like Palantir and Tesla to new heights. Cryptocurrencies also surged, influenced by Donald Trump's election and his pro-crypto stance, including promises to establish a national Bitcoin reserve. Meanwhile, high-yield stocks such as REITs and dividend-focused sectors like utilities lagged behind.

• AI-related stocks (e.g., QQQ, TSLA, PLTR) experienced rapid growth.

• REITs (e.g., VNQ, O) and infrastructure stocks (e.g., BEP, BIP) faced headwinds from stable long-term interest rates and elevated costs.

• Gold miners (e.g., NEM, AEM) struggled with rising costs and higher interest rate expectations.

Equities Compared

Several factors suggest that 2025 will bring a market rotation, moving capital from overvalued tech and crypto assets to undervalued sectors like high-yield dividend stocks, REITs, and BDCs.

1. Inflation Stabilization

   • While Trump tariffs could cause short-term inflationary pressures, these are expected to be offset by reduced government regulations and spending cuts.

   • Inflation data shows a downtrend in core components like shelter and groceries. For example, grocery inflation in 2024 was only 1.2%, with a further slowdown to 0.8% projected for 2025.

   • Energy prices are expected to decline as the Trump administration promotes increased domestic production.

2. Interest Rate Dynamics

   • The Federal Reserve is expected to continue rate cuts at a slower pace. Long-term interest rates are likely to remain stable or slightly decline, creating a favorable environment for high-yield stocks.

   • BDCs, REITs, and infrastructure stocks should benefit from these conditions, as they have already priced in higher rates.

3. Valuation Disparities

   • Tech stocks appear significantly overvalued, with inflated P/E and PEG ratios. For instance, Tesla's PEG ratio is 3.2, while Microsoft and Alphabet have PEG ratios above 2.

   • In contrast, REITs like Realty Income and Prologis trade at discounts to their net asset values. Infrastructure and midstream stocks offer strong yields and growth prospects, while gold miners like NEM and AEM trade at historically low valuations.

   
   

Investment Strategy for 2025

We are shifting our portfolio to capitalize on undervalued sectors that offer strong growth and income potential.

• High-Yield Stocks: Focus on REITs (e.g., O, PLD, ARE), infrastructure stocks (e.g., BEP, BIP), and midstream assets (e.g., EPD).

• BDC Opportunities: Look for high-quality BDCs like GBDC with double-digit yields and slight NAV discounts.

• Gold Miners: Companies like NEM and AEM present strong value due to their solid balance sheets and undervalued asset portfolios.

Conclusion

The market dynamics of 2024 favoring tech and crypto are unlikely to persist in 2025. A reversal is expected as capital shifts towards undervalued, high-yield opportunities. By positioning our portfolio accordingly, we aim to maximize returns in the changing market environment.