^InsightsIs the U.S. Bull Market Approaching Euphoria?

The State of U.S. Equities: Q4 2024 Insights and 2025 Outlook

U.S. equities closed Q4 2024 on a high note, fuelled by optimism surrounding what has been dubbed the “Trump trade.” Market confidence stemmed from expectations of earnings growth driven by tax cuts, deregulation, moderate protectionism, and benign inflation. The S&P 500 gained 5% during the quarter, hitting a record high in December. However, the gains were uneven, with only Consumer Discretionary, Telecommunications, and IT sectors achieving new highs.

A Stellar Year for U.S. Markets

The performance numbers tell the story of a banner year for U.S. markets:

• S&P 500: +23.31%
• Dow Jones: +12.88%
• NASDAQ: +28.64%

This impressive rally was underpinned by the strength of the U.S. economy, particularly the resilience of the American consumer. This economic momentum was the cornerstone of market growth in 2024.

The Bigger Picture: Long-Term Trends

As Sir John Templeton wisely stated, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” If this holds true, U.S. equities may be transitioning from optimism to euphoria. From January 2023 to December 2024, the S&P 500 rebounded 55.63%, reflecting the shift from skepticism to a bullish outlook.

In Episode 11 of our podcast, Beyond the Noise Q4 2024, we highlighted how skeptical market sentiment early in the cycle helped fuel growth. Today, many analysts predict continued growth in 2025, underscoring the current climate of optimism.

Signs of a Maturing Bull Market

Three key indicators suggest the bull market is entering its later stages:

1. Fund Flows and Momentum

Investor enthusiasm is at record highs:

• Over $1 trillion poured into U.S. ETFs through November 2024.
• Total ETF assets surged to $10.6 trillion, marking a 30% year-over-year increase.

Momentum-driven investments, particularly in the “Magnificent Seven” tech giants, which now account for 38% of the U.S. market, dominate the narrative. However, the behaviour of newer, inexperienced investors during potential downturns remains a key uncertainty.

2. Valuations at Extreme Levels

Valuations for the S&P 500 are now in the 99th percentile of historical highs, indicating stretched pricing. While high valuations do not directly forecast downturns, they have historically preceded challenging market environments. As Jeremy Grantham warns, “High valuations do not predict good times but have historically predicted the worst of times.”

3. All-In Sentiment

Investor behavior reflects unprecedented levels of optimism:

• Cash levels among U.S. fund managers are at their lowest since late 2021, triggering Bank of America’s FMS Cash Rule, a historical signal of market tops.
• U.S. households now allocate approximately 70% of their financial assets to equities, with nearly 60% of this in ETFs—a record high.

Partner with Verus Financial

Understanding these market dynamics is key to navigating a complex investment landscape. At Verus Financial, we specialize in guiding investors through every phase of the market cycle, offering personalized strategies tailored to your financial goals.

Whether you’re looking to grow your wealth, protect your assets, or plan for the future, our team of experienced advisors is here to help. Let’s build a strategy that aligns with your aspirations—because your success is our priority.