1/5/25

Weekly Market Recap

2025 has officially started, and although we’ve only had two trading days, U.S. stocks are off to a positive start. The S&P 500 has gained about 1% over the past two days. As we enter a new year, it's common for industry analysts to publish their stock market target prices for the year ahead. The average target price for the S&P 500 at the end of 2025 is $6,649, which would represent about a 12% upside from Friday’s close. The highest target among major firms is $7,100, representing a 19% gain, while the lowest target of $5,500 suggests about a 7% downside for the year.

So, what should we take from these numbers? I’d argue that we shouldn't draw too many conclusions. Predicting a specific price target for the S&P 500 over a one-year period is, in many ways, a futile exercise. For example, at the start of 2008, the average price target for the S&P 500 was around $1,588, which would have suggested a 12% gain for the year. As we know, that prediction was far from reality. Does this mean the analysts at these big firms are incompetent? No, it simply highlights the fact that predicting the future is incredibly difficult. Yet, every year the industry continues to issue these price targets. While it can be entertaining to speculate on where the market might go, I wouldn’t recommend making any investment decisions based solely on these yearly price targets, no matter the source.

Chart of the Week

Our chart of the week compares the performance of a market-cap-weighted S&P 500 index and an equal-weighted S&P 500 index. Even though there are 500 stocks in the S&P 500, the index is market-cap-weighted, meaning the largest stocks carry the most weight. In fact, the top 10 stocks currently have a weight of 38.7%. In other words, if you invest $100 in an S&P 500 index fund, $38 is allocated to just ten stocks, while the remaining $62 is spread across the other 490 stocks. In an equal-weight index, each stock is given the same level of representation, regardless of the company's size. So, if you invest $100 in an equal-weighted S&P 500 index, $0.20 would go into each and every stock. The chart highlights periods when the market-cap-weighted index outperformed (in green) and periods when the equal-weighted index outperformed (in gray).

What I find interesting is that over the long term, both strategies have performed well. In fact, it’s almost a 50/50 split in terms of which strategy outperformed the other, with the equal-weight strategy outperforming 52% of the time and the market-cap strategy outperforming 48% of the time. However, over shorter periods, there can be significant divergences between the performance of equal-weighted and market-cap-weighted strategies.Some investors try to time when leadership between these strategies changes, attempting to jump back and forth between the two. However, that can lead to performance chasing, with investors going all in on market-cap-weighted strategies after periods of significant outperformance and elevated valuations.  We believe both strategies (market-cap-weighted and equal-weighted) are valid ways to invest in stocks. We would simply caution investors against jumping back and forth between the two strategies.

Written by:

Ben Rones, CFA®

Senior Analyst at R&R Financial

The commentary in this newsletter is for informational purposes only and should not be taken as personalized investment advice

Chart of the week Source: FactSet, J.P. Morgan Asset Management. Guide to the Markets – U.S. Data are as of September 30, 2024.