13th January 2025

Index Movement For 2025

S&P500-1.0%
Nasdaq-0.8%
Aussie All Ords+1.5%

Welcome to 2025. What kind of returns will the year bring?

Let’s address this for both our major markets.

Australia first, because it is easy. I can’t see where any growth will come for Australian stocks. There isn’t any real sector I want to invest in within Australian equities. I just can’t find enough of a growth story to make it worthwhile.

So my first response for Australia is – zero.

Except it won’t be. It will likely be 10%+. Why? Because for reasons I have never been able to understand, our market copies the US. Makes no sense at all. We are a different country dominated by Financials and Mining. But it happens so I’ve given up trying to understand why and just accept it, because it is.

The US is also fairly easy.

The long-term average for US stocks is for growth of 10% per year (Australia is the same by the way, makes no sense).

But last year the S&P500 produced a total return of 25%. Even more impressive is this is the second year in a row it has done this.

I am reading a lot of commentary saying stocks are trading at elevated levels and some kind of cyclical top is close at hand.

Rubbish.

There are over 8000 stocks listed in the US so when they say, the market is overpriced, which stocks are they talking about? Because there is a very big difference when you look across sectors.

The reason they say the market is overpriced is because the index is market cap weighted. That means the larger market cap stocks have a bigger influence. The largest market caps are all Tech companies.

So, when people talk about “the market” they are mainly talking about the large Tech companies. And tech earnings are growing.

According to FactSet, Financials are expected to report the highest growth in earnings at 39.5% year-over-year for Q4 (just about to start announcements for this). Communication Services is second at 20.8% (S&P created this sector a few years ago to split up Tech because Tech was getting too big. It includes Google and Meta so I just think of it as Tech too). The Tech sector is third at 13.9%.

So the biggest three sectors are all expected to show earnings growth over 14%.

If earnings are growing that fast, there is no reason stock prices cannot continue higher too.

I suspect the S&P500 index will put in another good year. I’m going with a prediction of a gain of 15%.

Yes, we have had a slightly weak start because economic numbers have been too strong. The Jobs report showed the US created more jobs than expected and wages were up 0.3% since the month before. This led to concerns inflation might come back and the Fed will not cut rates.

High interest rates are not good for stocks, especially small-cap, because these guys usually need to continually borrow or raise funds to operate. It has less impact on large-cap who don’t have such requirements.

The weakness we have seen in the past few days is nothing to be concerned about. Nothing has changed substantially. Earnings are growing and the long-term path for interest rates is down. Throw in a change in administration to one of less regulation and pro-business and you have a near perfect environment for stock market gains.

This year is likely to be more volatile than last year. That would be normal for this stage of the cycle. It means you need to spend the year in “buy the dip” mode.

To kick this off, here is something to buy.

Buy TradeDesk (TTD)

I’ve never been a fan of Netflix. I couldn’t see how it could grow fast enough to justify the share price. But now I understand why I am wrong about it.

I made the cardinal mistake of not seeing how they could monetise their immense client base. I really dropped the ball on this one. But I have found a way to profit. To understand why, you need to see how Netflix is changing

Netflix streamed the boxing farce between Mike Tyson and Jake Paul on November 15th. This was a first, live event stream for Netflix and Netflix passed the test with flying colours. It then streamed a football match on Christmas Day. You can expect them to expand on this, and when they do, they will start showing adverts.

Consumers don’t like adverts, but consumers like watching live sports after the event even less. So a viewer will put up with an advert in the middle of a live event.

Digital ads work much better than traditional advertising because they are much more targetted. Netflix knows a lot about who is watching what and when. Advertisers will pay more for digital ads because the response rate is higher.

If you think about it, old terrestial TV had adverts. We became used to them. Why shouldn’t digital TV also have ads?

Which is where TradeDesk comes in.

Trade Desk is the keeper of the biggest and most widely used digital ad platform for ad buyers that is not owned by either Google or Meta Platforms (META). The company has found a way to effectively monetise our free time through the efficient placement of digital ads.   

Brands can programmatically bid for, purchase, and deploy digital ads across real-time ad inventory from media companies like Netflix, Disney (DIS), Fox, NBC Universal, and others. Execs at Trade Desk claim partnerships with more than 150 publishers, broadcasters, and media owners across display, connected TV, digital out-of-home, and audio. 

The recent pullback on market weakness offers a nice opportunity to buy

Warning

Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.