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Investors, starved of a year-end rally, may need to brace for further bouts of disappointment as 2025 kicks off, market analysts say.
After US indexes were catapulted to double-digit gains through 2024, momentum has sputtered in the final days of the year. The market has been struggling in the days that typically see investors enjoying the year-end "Santa Claus" rally.
The benchmark S&P 500 has dropped over 2% since Thursday, led by a sell-off in popular tech names.
"This is, I think, just evidence of just how nervous the market is, and ultimately, the market is looking for these reasons to pull back," Gene Munster, managing partner at Deepwater Asset Management, told CNBC on Friday.
There was no clear catalyst for tech investors to retreat, but Munster noted that market euphoria has increasingly come under strain this month. Traders have grown "spooked" after the Federal Reserve indicated fewer interest rate cuts next year, a stance that continues to test market confidence.
With inflation uncertainty behind the Fed's renewed hawkishness, Munster suggested that investors are selling off ahead of next month's consumer price index report. The January 15 inflation print is scheduled ahead of tech earnings, he noted.
"For those investors who have enjoyed this ride, you look at the next month, it's understandable that we have had this anxiousness in the market," he said.
Wharton professor Jeremy Siegel agreed that January could initiate a reversal for the Magnificent Seven stocks as investor optimism becomes challenged. The market will "switch around" in 2025, broadening away from the tech stocks and potentially leading to weaker returns.
"I think there might be some disappointment. As time has gone on, I think the probability of a correction next year, which is defined as a 10% drop in the S&P, is getting higher," Siegel told CNBC. "The major forces to propel things upward, I think, have already been built in."
None of this is to say US stocks won't keep climbing. In Munster's view, tech valuations remain justified, but investors should be prepared for pullbacks to become more common.
According to Fundstrat's Tom Lee, the S&P will still hit 7,000 in the first half of 2025, even if the upcoming inflation report aggravates market jitters.
"I think investors have been a bit nervous since December 18: the FOMC rate decision and worry that the Fed may not be as dovish as investors previously thought," the managing partner said in a CNBC interview.
However, shifting Fed attitudes haven't changed fundamental tailwinds for 2025, he said, citing expectations for improved CEO sentiment and pro-business policies from the Trump administration.
"I think one of the lessons of 2024 has been we've seen periods of market wobbling and weakness. We know investors get pretty quick to turn bearish when that happens, but it turns out that these have all proven to be buying opportunities," Lee said.
