MW The stock market rarely scores hat tricks. This strategist fears what's next.

By Barbara Kollmeyer

Expect a 10% to 15% correction for stocks, says JPMorgan strategist

After Wall Street largely underestimated how great 2024 was going to be for equities, the question now is whether 2025 can keep up the momentum.

"For investors, there's little room for error with valuations this high and since valuations are now driving markets just as much as earnings growth," wrote Michael Cembalest, chairman of market and investment strategy for JP Morgan Asset & Wealth Management, in his just published annual outlook.

And in our call of the day, Cembalest flags a worry as he zeroes in on one recent feat for stocks - the S&P 500 SPX has logged two 20%+ years in a row, which has only happened 10 times since 1871.

The index closed out 2024 with a 23.3% gain, which follows a 24% rise in 2023. Observe his chart:

"Only during the 1990's bull market and the Roaring Twenties did the good times continue for another two years. I expect a 10%-15% correction at some point in 2025 as the Alchemists apply their elixirs to the U.S. economy," said Cembalest.

By "alchemists" he's referring to the incoming administration of President-elect Donald Trump, which Cembalest expects will "break" something - with deregulation, tariffs, tax cuts, cost cutting, deportation, among those areas laid out as goals by team Trump.

"Plan accordingly: U.S. equity markets should end the year higher thanthey began but be sure to have plenty of liquidity to take advantage of what might be a volatile year," said the strategist.

Cembalest suggest investors watch the 10-year Treasury note BX:TMUBMUSD10Y for an accurate "barometer" of the incoming Trump administration.

"If the supply side benefits from deregulation and tax cuts overpower the inflationary impacts of tariffs, a shrinking labor supply and large budget deficits, the 10-year Treasury should remain in the range of 4.5% to 5.0%. But if the 10-year rises meaningfully above 5.0% and stays there, something will have gone very wrong," he says.

The good news he sees? The current soft landing could keep going, marking a rare period in the last 60 years that Fed rate hikes to stem inflation didn't spark a recession. Also labor market conditions are easing, "not cratering," while consumer and business capital spending are rising at a pace that's consistent with 2.5% growth.

Cembalest said deregulation could boost growth, provided it's "light-touch" as that combined with a "venture capital recovery which is already under way could keep animal spirits going," he said.

Markets

U.S. stock futures (ES00) (YM00) are climbing, led by tech (NQ00), while benchmark Treasury yields BX:TMUBMUSD10Y are easing. Follow the action in MarketWatch's live blog.

   Key asset performance                                                Last       5d      1m      YTD     1y 
   S&P 500                                                              5881.63    -2.62%  -2.78%  23.31%  24.01% 
   Nasdaq Composite                                                     19,310.79  -3.60%  -0.87%  28.64%  30.78% 
   10-year Treasury                                                     4.574      -1.50   39.30   -0.20   65.41 
   Gold                                                                 2645.7     0.46%   -1.07%  0.24%   29.08% 
   Oil                                                                  71.86      2.41%   4.55%   -0.01%  -1.59% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor's Business Daily.

The buzz

Weekly jobless claims are due at 8:30 a.m. Eastern and construction spending is coming at 10 a.m.

Unity Software stock $(U)$ is jumping in premarket, which may or may not be due to an X post from the investor known as Roaring Kitty.

Tesla $(TSLA)$ is expected to release fourth-quarter delivery numbers on Thursday.

An explosion of a Tesla Cybertruck on New Year's Day in front of a Trump hotel in Las Vegas killed one person, leaving at least seven injured. Hours earlier, a pickup truck was driven into crowds in New Orleans on New Year's Eve, killing at least 15.

Best of the web2

A new study says 100% stocks beats the traditional 60/40 portfolio

These economists say Donald Trump's 'Maganomics' will damage growth.

Mining start-up backed by Bill Gates and Jeff Bezos now valued at $2.96 billion.

The chart

The above chart from Deutsche Bank lays out the winners and losers of 2024. Stocks, precious metals and the dollar were on top, while French assets, oil and the yen were among those faring worst, report strategists Henry Allen and Jim Reid.

Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

   TSLA  Tesla 
   GME   GameStop 
   NVDA  Nvidia 
   HOLO  MicroCloud Hologram 
   MSTR  MicroStrategy 
   PLTR  Palantir Technologies 
   RGTI  Rigetti Computing 
   NIO   NIO 
   AAPL  Apple 
   AMD   Advanced Micro Devices 
   AMZN  Amazon.com 

Random reads

Stunning Japanese city dubbed "seventh ring of hell." Tourists blamed.

A California surfer may have ridden the biggest-ever wave.

Ding dong. The murder hornet declared dead in the U.S.

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-Barbara Kollmeyer

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January 02, 2025 06:40 ET (11:40 GMT)

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