As we kick off the new year, it’s a good time to step back and assess where we might be headed. In the face of fear and uncertainty, the market in 2024 experienced very little volatility. Every sell-off was met with fierce buying, driving most of the major indices past analysts’ price targets. Near all-time highs, will the market keep its momentum or reverse? Here’s what I’m interested in as we begin the new year.

S&P 500: Where we stand and where we’re heading

Year-end sentiment was divided between optimistic and cautious. The S&P 500 soared over 20% in 2024, but some fear that the market is overpriced and concentrated. Market breadth improved a little bit, but tech stocks accounted for 60% of the index’s gain since 2022. This type of concentration can make the market more susceptible to risks — of which there are many.

Key concerns:

• Inflation: Both CPI and PCE continue to outpace real wage increases for many Americans. Consumer spending appears to be increasingly reliant on credit and buy-now-pay-later programs to compensate.

• Energy prices: Gas is still significantly higher than it was pre-pandemic. Additionally, the price of electricity has increased dramatically in the last few years and shows little sign of stabilizing.

• Mortgage rates: Despite Federal Reserve cuts, rates have risen and continue to put pressures on demand and sales.

• Unemployment: Currently at 4.2%, rising unemployment may signal an emerging slowdown, especially given historical patterns of unemployment spikes.

Despite these concerns, the market remains elevated. Even with CNBC’s investor sentiment teetering between fear and extreme fear, the S&P 500 is still up 43% since November 2023. This data is accessible to all, so why is the market continuing to rally? Here are two potential possibilities.

1. Inflation and the “Great Melt-Up”

The market’s resilience may be explained through “The Great Melt-Up,” a concept attributed to ClearValue Tax in his video titled “The Great Melt-Up Will Strike The USA: My Advice to You.”

He explains how inflation has driven investors to chase assets that keep up, creating a feedback loop of rising prices attracting more capital. He also argues that the U.S. Government may be using inflation to reduce its debt burden. If so, asset prices could keep rising until the system breaks.

In this situation, it’s better to stay invested — even at high valuations — to protect your finances from inflation.

2. U.S. tech and the global economy

The U.S. market’s strength in AI and tech has attracted global capital, especially as other economies falter. Europe faces slow growth, energy challenges, and other inefficiencies. Likewise, China is suffering from economic instability and a weak property market. This dynamic, in light of U.S. strength, creates more market enthusiasm despite systemic risks.

Warren Buffett’s 2008 op-ed “Buy American. I Am.” reminds us that U.S. stocks have a unique predisposition to endure hardships. It’s a perspective worth considering — especially if you’re bearish like me.

Portfolio updates

Heading into 2025, here are some of my picks regardless of the market’s direction. They are both undervalued enough to weather a sell-off and ready to benefit from improving market breadth.

OXY (Occidental Petroleum):

• Tailwinds: Crude futures are on the rise after consolidating for the last few months. Occidental should see some relief from the rally.
• Buffett’s backing: Berkshire Hathaway’s continued investment in OXY adds confidence, signaling strong fundamentals and potential long-term upside.

WBA (Walgreens Boots Alliance):

• Reversal watch: The unusually high trading volume at historically low valuations, coupled with a stabilizing price, suggests we may be at or near a short-term bottom.
• Buyout potential: Walgreens is in the process of cutting costs and discussing a private equity buyout with Sycamore Partners.
• Decreasing market share: Amazon’s growing market share in pharmaceuticals is chipping away at profits for Walgreens and its competitors.

INTC (Intel):

• Valuation appeal: Investor sentiment is at extreme lows, and a floor may be forming. Intel offers a viable long-term play for those confident in the company’s ability to become profitable again.
• Foundry concerns: Intel’s foundry services remain uncertain, and the company doesn’t appear confident in the profitability of its manufacturing efforts. This is disappointing, as my optimism for Intel’s future is contingent on a full pivot to manufacturing. This will likely lead to more volatility ahead.

BA (Boeing):

• Strong demand zone: There seems to be a strong demand zone between $120 and $150. With the stock currently trading at $170, it’s still relatively attractive.
• Increased flying: Air travel is increasing, suggesting more demand for airplane manufacturing.

PYPL (PayPal):

• Opportunity in Innovation: PayPal maintains a dominant position in eCommerce while continuing to innovate. With sustained demand for digital payment solutions and the stock trading at 2019 levels, the current price looks like a bargain.
• Honey controversy: Honey, a subsidiary of PayPal, recently faced a scandal involving content creators. While the market response has been muted, the company could be at risk of future lawsuits.

Keep an eye out

Looking ahead, several key themes could shape the year:

• Interest rates: The market has been pricing in very soft (dovish) monetary policy. Any unexpected shift could trigger a spike in volatility. Stay prepared for surprises.
• Tech vs. value: Last year was all about tech, but value stocks may offer better performance if market fears resolve. Watch underperforming sectors closely to gauge whether market breadth is improving.
• Credit delinquencies, auto loans, and mortgages: Despite claims of a strong consumer, rising delinquencies on auto loans and credit cards tell a different story. Slowing demand for homes and cars further suggests the consumer may be weaker than previously thought.

Final thoughts

January offers a chance to recalibrate. Cut through the noise and focus on thoughtful, in-depth market analysis. Stay disciplined, stay curious, and prioritize the process over short-term wins.

Here’s to a successful start to 2025!