No repeat of 2024 performance for U.S. indexes

Elevated market valuations unsustainable

After two booming years that saw major U.S. stock indexes rise more than 20%, and even the boring S&P/TSX up strongly, it’s unlikely that we’ll see a repeat in 2025. There are a few reasons why.

First, Canadian stocks are more reasonably valued than those in the U.S., around 15 times expected earnings as opposed to 25 times in New York.

Second, the U.S. market has become enormously concentrated, with the Magnificent Seven – Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, Nvidia, and Tesla – accounting for over one third of the S&P 500’s valuation and almost 20% of the entire world’s market capitalization.

Finally, the U.S. market is at one of its three most expensive points in the last 60 years (the others being the Nifty Fifty market in 1972-73 and the internet bubble in 1999-2000).

Whenever markets reach valuations at these elevated levels, the expected return over the next 10 years (including dividends) is zero to 2%-3% per year. In the same way as buying 10-year government bonds at the depths of the Covid panic in 2020 ensured that investors experienced the worst returns in 40 years as interest rates rose from 0.25% to 5.25% in 2022. Investors buying the market-capitalization-weighted indexes in the U.S. at present levels will experience similarly disappointing returns in years to come.

Investors in Canada and other developed markets such as the U.K. and Europe are better positioned because their domestic valuations are more reasonable. The composition of their markets, with large weightings in financials, energy, and resources, provides exposure to sectors that should benefit from lower interest rates and higher growth. For European stocks, the possibility of some resolution of the conflict in Ukraine, and the election of a new government in Germany, give additional reasons to be cheerful.

Interest rates should continue to trend downward, although persistently high inflation, reinforced by tighter immigration policies making labour more expensive, could see no more than a couple of 0.25% reductions in the U.S. this year. European Central Bank President Christine Lagarde has forecast another three quarter-point interest rate cuts, which would take short-term rates down to 2.5%. This will probably contribute to further weakness in the euro against the U.S. dollar, which is flirting with parity for the first time in a decade or more. A lower currency should help European exporting industries, such as autos, pharmaceuticals, and aerospace.

Sectors with interest-rate sensitivity, such as utilities, telecoms, real estate, and financials, have already benefited from lower rates and should continue to do so. European government bonds yielding 2.5-3.5% are providing an absolute yield that is 1% lower than the U.S. However, they will be hit by a weaker euro, and so do not look attractive. U.K. gilts yielding 4.6% are an outlier as they may benefit from political stability with the new Labour government elected with a big majority for the next five years.

A recovery in China and Europe and continued reasonable GDP growth in North America and Canada, should support demand for commodities, whether conventional energy such as oil and gas, or new economy metals such as copper, cobalt, lithium, nickel, and iron ore. European energy stocks such as BP, Shell, and ENI sell at a discount to their U.S. counterparts, while diversified miners such as BHP, Rio Tinto, and Anglo American are cheap both relative to their earnings and compared with previous occasions when prices were at these levels. They should benefit from higher volumes and pricing, as demand for metals such as copper, nickel, and cobalt should continue to grow with the electrification of the auto industry and the switch to renewable energy sources.

Finally, with geopolitical uncertainty at high levels, gold has almost matched the performance of the S&P 500 over the last year, up over 25%, but the best gold miners in terms of location of mines and exposure to geopolitical risk are Canadian listed companies.

Investors should not expect another year of 25%+ returns. Buying stocks with strong balance sheets and paying sustainable dividends, supplemented by short- to medium-duration North American government bonds and some exposure to precious metals as portfolio insurance, should provide a reasonable return with lower volatility than having over one third of your portfolio in the very expensive Magnificent Seven. Markets that have lagged the U.S. may benefit from flows moving out of what are perceived to be the very highly valued mega-capitalization technology plays into more reasonably valued sectors.

Gavin Graham is a veteran financial analyst, money manager, formerly Chief Investment Officer of BMO Financial, and a specialist in international investing, with over 35 years’ experience in global investment management.

Notes and Disclaimer

Content © 2025 by Gavin Graham. This article first appeared in The Internet Wealth Builder newsletter. Used with permission.

The commentaries contained herein are provided as a general source of information, and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.

The views expressed in this post are those of the author. Equity investments are subject to risk, including risk of loss. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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