2024: What Could Go Right!

2025: What Could Go Wrong?

Where to begin? It’s 2025, Happy New Year!? The markets in 2024 provided stellar returns and investors mostly asked and sought good news. Artificial Intelligence remains center stage with the markets trying to parse winners and losers ahead. To date, everyone is a winner! For companies, either talk AI as an accelerator to your revenue growth or show it, both sufficed in 2024. It is likely that the rubber meets the road in 2025 requiring companies to show AI driving their business, not just providing presentations that it will (i.e. CRM and ORCL). Perversely, this is much like the Fed’s disinflationary campaign which seems to have stalled of late. However, was the Fed truly successful using their blunt tools? Prices went up a ton for a few years compounded and only leveled out in 2024, still growing north of their 2% goal. Perhaps the massive productivity delivered by implementing AI can also fix what ails the Fed’s success? All in, it’s a fine line the difference between investors focusing on what could go right versus what could go wrong ahead.

The markets never have and never will like uncertainty. Equally, buyers live higher and sellers live lower. And finally, no one cares about valuation until they start losing money. As witnessed in this week’s volatile trading, we saw the QQQ rally from $510.23 at the close of 1/02/2025 to $524.54 and a subsequent reversal to $507.19 at Friday’s close. Is it the calendar flipped? Is it the 10 year yield has gone up 50 bps since early December following the last Fed meeting where they actually cut rates? Or maybe things are just fine in the stock market, and this is just a pause that refreshes? Let’s discuss.

Nvidia hit an all time high into CES closing at $149.43 on a multi-year (even decade) growth trajectory narrative, there-after replaced by: 1) worries they blinked on the response to the Biden Administration outgoing restrictions which cap countries AI allowances and 2) sudden real concern of the product transition from Hopper to Blackwell (classic tech product transition). Jensen said everything a human (not AI) could possibly say at CES to exhibit his belief this is a multi decade growth story. But, will there be pauses along the way, especially when your revenues are now $38 billion per quarter not $6 billion per two years ago. So goes Nvidia, so goes the market?

Believers in “IT’S BIG” have been rewarded the past couple of years for sure. The Mag7 were up almost 60% in 2024, but how much was multiple versus earnings expansion? Nvidia is responsible for much of the earnings revisions up 86% (EPS now $4.41 for this fiscal up from $2.37 a year ago estimated), followed by META (27% increased EPS expectations), Amazon (27%), Microsoft (0.5%), Apple (4.5%), Tesla (down 39%) and Google (18%). In other words, as a group, earnings expectations rose about 13% while the multiple expanded 47%. Of course, this is rudimentary as Tesla defies logic valuing the company on its car and energy storage businesses. Apple isn’t really growing much and Microsoft’s spending is hurting their EPS growth. Suffice to say, the question to ask for the stocks, as a group, do you expect more multiple expansion in 2025? Do you see earnings revisions higher and for which names?

And, of course, now we need to add Broadcom to the Mag7 mixology as they told a story on their TAM (we mostly believe) that helped this AI story trump the fact that most of the revenues are stodgy old software revenues with an accounting gimmickry to their VMWare acquisition (to show re-acceleration). Earnings for this fiscal year started at $5.60 a year ago and now sit at $6.33 (up 13%) while the stock more than doubled in 2024. Broadcom now has a demanding 35x multiple and needs to show upward revisions each quarter, especially in their custom ASIC business to keep investors interested. And then there is Netflix that has to keep feeding the beast with either sub upside or free cash flow upside.

Again, the fine line of the market psychology of the glass half full on 1/2/2025 at QQQ closing at $525ish versus the post bond dump close (half empty) on Friday below the 50 day moving average with next support the 100 day at $496.96. Other earnings headwinds not factored into expectations you ask? The “what could go wrong” question? Well, the dollar is stronger by 7.5% year-over-year and nearly 6% versus October earnings season alone! For sure, this will crimp revenue upsides ahead and possibly earnings depending on the company and their local cost accounting outside the US.

Hopefully the threatened tariff regime by the incoming Administration isn’t painful for the consumer or detrimental to corporate C Suite decision making. Mass deportations sound frightening, if they occur, to the people targeted, their families and the overall workforce in the US. At the same time, perhaps the global wars in Europe and the Middle East can be resolved in 2025 while no new ones are initiated. Also, what if Trump does not live up his pro BTC billing and the bitcoin strategic reserve strategy? BTC isn’t really discounted the buying of 1 million BTC by the US Government, for sure, but the psychology would be badly bruised short term if it does not happen. Look how easily the Quantum Computing frenzy ended with Nvidia’s Jensen just mentioning he thought the coming of the technology wasn’t 10 years away, more like 15 or more. Poof, the stocks got cut in 1/2.

To be clear, the Mag7+ do not have the animal spirits of Quantum Computing in their multiples. They are not ripe for 50% haircuts. But, the upside case suddenly seems a bit harder in 2025. An old friend writes a newsletter to his retail clients with a positive bent asking “what could do right?” Of course, gathering assets requires such thinking and is rewarded. It does not seem like the market has asked the question, “what could go wrong” lately and the moments of truth seem to be coming post January 20th and this earnings season.

As we begin our 2025 trading journey, I want to thank all of the supporters for this substack who subscribe to the premium version. The Rob’s Educated Guesses community has grown into an investing family for me. I speak to many of you regularly via the WhatsApp text list and we share data points and views of the markets and stocks. Please ask to be added if you have not already.

I leave you with this thought for 2025: If the markets are down this year, do you have a plan to make money? What if they are down considerably at some point but finish green (or stay down)? Markets like 2023 and 2024 are quite unusual. The past two years did not test investors who have taken a mentally passive approach to investing just “owning” good companies. It is hard to remember that Paypal was a “good company” in 2021 at $300, isn’t it? We try and block out these type moves as “I did not own that one” or “that cannot happen again”, right? If we add value in our writing and WhatsApp text list (we know we do!), it’s identifying the big picture for sure, but also the data points along the way to thread together what could go right but also acknowledge what could go wrong.

Rob’s Educated Guesses