As we traverse through 2025, the U.S. stock market, particularly the S&P 500 (SPX), has continued to exhibit a trajectory of growth, albeit with notable volatility and concerns about overvaluation.
The SPX has seen significant volatility during the first trading days, buoyed by economic resilience and policy expectations.
However, this year has also been marked by moments where market optimism seems to outpace fundamental realities, leading to caution among investors.
SPX performance in 2025:
The S&P 500 has experienced a year-to-date increase of 0.20% at the time of writing this article, with some analysts predicting a further rally before potential corrections.
The index has been influenced by a combination of AI growth, deregulation hopes, and continued low interest rates which have buoyed stock valuations.
Key data points for investors
For Zimbabwean investors considering the U.S. equities market, several data points are pivotal:
Jobless claims: As per Investing.com, today's jobless claims came in at 201,000, lower than the analyst estimate of 214,000. This suggests a robust labour market, potentially signaling continued consumer spending and economic growth. However, it's worth monitoring for any sudden shifts that could indicate a cooling economy.
Inflation rates and interest rates:Inflation has been closely watched, with expectations for it to reach the Federal Reserve's target of 2% early next year. The bond market remains sensitive to these expectations, affecting stock valuations through changes in interest rates.
Earnings growth: Analysts at Bank of America predict a 13% increase in S&P 500 earnings for 2025, driven by sectors like technology and healthcare. However, the actual performance of earnings can sway market sentiment significantly. I tend not to dwell much on forecasts because it's extremely hard to forecast the short term direction of the stock market.
Economic policy uncertainty: With a new administration in place, policy changes, especially in trade and immigration, could introduce volatility. The US Trade Policy Uncertainty Index has spiked, reflecting this increased unpredictability.
Performance of top stocks
NVIDIA: Has been a standout performer in 2025, driven by the AI boom and demand for high-performance computing chips. The stock has seen substantial gains hitting an all-time high of over US$152.50 last week before pulling back on Tuesday and Wednesday, reflecting optimism about future technology trends. While I am confident NVIDIA might continue to go up close to analysts' average of above $167.85. I am concerned about the high forward price earnings ratio.
Tesla: Tesla's performance has been mixed, with significant volatility due to production challenges and market sentiment shifts. Nonetheless, its innovative edge in electric vehicles and energy solutions continues to attract investors.
Despite the stock hitting $479.86 on December 17 last year, it has pulled back, closing at $394.94 in Wednesday's trading. As an investor, I get so concerned when a stock continues to go up without justification in fundamentals. I believe it may be a matter of time before the stock drops to the mean valuation that's actually justified by earnings.
Howard Marks' caution on market valuations
Howard Marks, in his memo "On Bubble Watch," warns investors about the potential overvaluation in the market. He points out that the current P/E ratios are historically high, suggesting caution:
"The market has become expensive by many measures, including P/E ratios which are well above their historical averages." This observation from Marks underscores the risk of investing in an environment where stocks might not be priced according to their intrinsic value but rather by market exuberance.
Marks also discusses how behavioural factors can lead to bubble-like conditions, where investors might be buying in fear of missing out rather than based on sound valuation metrics. This scenario is particularly risky for those looking to enter the market now.
Strategic investing in light of overvaluation
As a cautious investor, I recognise the allure of high growth stocks but am wary of the high valuations. Here's how I approach:
Diversification: Spreading investments across various sectors and not just tech giants can mitigate risks associated with overvalued stocks. I don't recommend stocks, but I own ETFs that track the SPX. These give me diversification in case some sectors don't do well.
Value investing: Seeking out companies with strong fundamentals but lower P/E ratios could offer better long-term value, especially in sectors not currently in the spotlight. If you need more insights on this, feel free to book a paid session via www.streetwiseeconomics.com.
Monitoring market sentiment: Keeping an eye on market sentiment indicators like the VIX can provide insights into potential volatility, guiding when to enter or exit positions.
Geopolitical and policy risks: Understanding the implications of US policy changes, particularly in trade, can prepare one for potential market shifts.
Overall, I like to keep a fairly high percentage in case or securities that are not correlated with the equities market. I believe, as the late Charlie Munger mentioned, a lot of money can be made in waiting - so patience is key.
In the meantime, I continue to research and have a number of fundamentally valued stocks on my watchlist.
In case the market drops, I can load up on the few stocks I would have researched on, if there is no structural change in their business models.
In conclusion, while the US stock market in 2025 offers opportunities, especially in tech sectors, the signs of overvaluation caution against overly aggressive investing.
By considering these data points and insights from seasoned investors like Howard Marks, Zimbabwean investors can make more informed decisions, balancing between the excitement of growth and the prudence of valuation.