2024 was one of the most liquid market environments I’ve seen in years. Even during this summer’s swoon in the tech sector, liquidity as measured by various credit spreads, and even the NYSE advance-decline line, refused to break down under the weight of the pressure.
That liquidity is poised to carry forward into 2025, which presents a supportive backdrop for the market as a whole.
In essence, the liquidity that gave strength to this year’s bull market looks set to continue.
Although with a change in the White House, and associated policy preferences, market participants will likely prioritize a new set of sectors and asset classes.
So, as we approach the new year, and given the bullish undercurrents, let’s review a handful of those asset classes that look poised for a big 2025.
The most immediate beneficiary of the election, at least based on returns, appears to be the crypto market, which has been in rally mode ever since the November election results came in.
More than perhaps any other asset group, strength in cryptocurrencies like Bitcoin reflects a willingness among investors to embrace risk. For that reason, Bitcoin price rallies have nearly always led, or accompanied, equity market strength, with the past month being no exception.
And since President-elect Trump has made clear he is a friend of crypto (he has said he wants the U.S. to become the “Bitcoin superpower of the world,”), I expect that crypto will be one of next year’s outperforming markets.
Another market that I expect will show outsized strength next year is small-cap stocks in the aggregate.
For the last few years, the small caps were stuck in limbo and have underperformed their large-cap cousins, but that dynamic is now changing.
As the asset manager Roger Montgomery recently observed, the small-cap stocks of innovative businesses with pricing power should perform well under the pro-business Trump administration.
He sees a likely repeat of Trump’s first presidency in 2025, including tax cuts and a deregulatory environment, both of which theoretically bode well for small-cap companies.
“The last Trump administration emphasized policies that stimulated domestic economic growth,” said Montgomery, “such as infrastructure spending and tax reforms, benefiting these companies.”
What’s more, as small-cap companies typically derive a big portion of their revenue from domestic operations, a stronger U.S. dollar—which many analysts anticipate under the new administration—should also boost the small caps.
And with the Russell 2000 Index once again trading near its late 2021 high, the small caps are far from being overcrowded.
Cabot’s resident small-cap expert, Tyler Laundon, certainly has many more insights into this realm than I do, but we both see the small-cap arena as being one of the best opportunities in town for investors heading into 2025.
Another area of the market that should benefit under the new president is the energy sector, as Trump has promised to “unleash energy” across a number of energy-related industries. One of those industries is the much-maligned coal space, which could see a comeback of sorts in the next couple of years.
Prior to the election, growth in coal demand was expected to flatten out in 2024 and 2025 as the U.S. and other countries shift to cleaner forms of energy production. But those expectations are now in question in the election’s wake.
According to industry analysts, Donald Trump’s victory could extend the life of domestic coal-producing plans for years if he implements plans to overrule the Biden administration’s environmental rules for coal, which bodes well for producers of both thermal and metallurgical coal.
Indeed, already we’re seeing increasing signs of life in the largely overlooked coal stock space. The evidence includes recent earnings-related rallies in coal producers CONSOL Energy (CEIX) and Hallador Energy (HNRG). And among smaller players in the coal mining space, I’m increasingly seeing a number of potential turnaround setups taking shape as informed investors are evidently pivoting toward coal stocks as a value play in what looks to be a looser regulatory environment for energy next year.
All told, while there should be plenty of opportunities for investors to profit from next year’s changing regulatory environment, the areas of small-cap stocks in the aggregate—and energy stocks and crypto in particular—are the ones I believe will benefit the most.
