As 2024 draws to a close, it’s an opportune moment to reflect on history and the lessons it offers for the investment landscape ahead. The extraordinary performance of the U.S. stock market over the past two years has dominated headlines, but does this signal smooth sailing—or a potential storm on the horizon?
The U.S. Dominance
The U.S. market continues to be a heavyweight in global equities. The U.S. accounts for a staggering 73.92% of the MSCI World Index. The S&P 500 has delivered annual returns exceeding 20% in 2023 and 2024—levels not seen since 1997-1998.
This success has created a loop: investors pour more money into U.S. markets, further driving prices upward. While this trend is alluring, history suggests we should remain cautious of such concentrated growth.
Recognising Bubbles
One of the hallmarks of a market bubble is widespread denial of its existence, paired with a disregard for fundamental investing principles.
The Man Group’s analysis of historical bubbles provides a telling example, highlighting how exuberance and overconfidence can distort valuations.
Another red flag is insider activity. Take the Magnificent Seven—the most prominent U.S. tech companies. In these cases, directors are selling rather than buying shares, signalling potential concerns about sustainability.
Additionally, the Fear and Greed Index, a measure of market sentiment, started 2024 in a state of extreme greed and ended in extreme fear—a stark contrast that often precedes volatility.
The Decade Ahead
Predicting exactly when a market correction will occur is nearly impossible. However, several indicators can guide cautious investors.
Chart 1: Decadal Investment Themes
Each decade tends to be shaped by dominant investment themes. The 2020s have been characterised by U.S. market supremacy. While it is tempting to believe this trend will persist indefinitely, history suggests otherwise.
Chart 2: Market Valuations
Data from JP Morgan underscores a key principle: the higher the market valuations, the lower the expected future returns. The U.S. market’s current valuations warrant scrutiny.
Chart 3: Future Return Potential
Another JP Morgan analysis highlights that markets with the lowest current valuations often have the greatest potential for future returns. This reinforces the importance of looking beyond the U.S. for opportunities.
The Case for Diversification
As we move into 2025, exercising caution is prudent. While predicting when a potential bubble might burst is impossible, the signs suggest a measured approach.
Key strategies to consider:
Diversify Geographic Exposure: Reducing an overreliance on U.S. equities can mitigate risks while preserving potential upside.
Monitor Valuations: Keeping an eye on markets with lower valuations may uncover opportunities for long-term growth.
Stay Balanced: A diversified portfolio with exposure to multiple regions and sectors can help navigate uncertainty.
Conclusion
2025 may not bring an immediate correction, but the lessons of history suggest vigilance. By staying aware of market signals and prioritising diversification, investors can better protect their portfolios against potential downturns while staying poised for future opportunities.
Risk Warning: The value of investments can go down and up, and you may not get back the amount you initially invested. Past performance is not a reliable indicator of future results. Diversification does not guarantee a profit or protect against loss. Always seek professional financial advice tailored to your circumstances before making investment decisions.
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