Stocks Rally in Early ’25, New Winners Emerge

January 2025 Monthly Market Commentary

The S&P 500 index increased 6.0% in November but underperformed the Russell 2000 Index’s 11.1% return. All eleven S&P 500 sectors traded higher, with Consumer Discretionary and Financials gaining more than 10%. In contrast, defensive sectors, such as Health Care, Utilities, and Consumer Staples, underperformed the S&P 500.
Corporate investment-grade bonds increased 1.8% as Treasury yields declined, marginally outperforming corporate high-yield’s 1.6% total return.
International stocks continued to underperform US and traded lower for a second consecutive month. The MSCI EAFE developed market stock index fell 0.3%, while the MSCI Emerging Market Index declined 2.7%.

Market Leadership Shifts as Broader Rally Takes Hold

The market kicked off 2025 with a continued rally, but stock and sector leadership changed. Large Cap Value stocks, which had lagged over the past year, staged a resurgence, outperforming Large Cap Growth by more than 2.5% in January. The Dow Jones Industrial Average also rebounded toward its all-time high, reversing a late-2024 downtrend. Meanwhile, the Nasdaq 100 and Technology sector (key drivers of last year’s gains) lagged behind the broader market.

The rotation came as investors adjusted expectations amid shifting fundamentals. AI-related developments out of China raised fresh concerns over U.S. technological dominance, putting pressure on the high-growth names that had led markets higher. With valuations stretched and leadership rotating, investors appear to be broadening their exposure beyond last year’s high-flying winners. So far corporate earnings for 4Q24 have been strong, and we expect broad earnings momentum to be a catalyst to markets going forward. Our key bear case concern remains the labor market, which for now is holding up.

Tech Sector Hit as AI Competition Intensifies

A major development in the artificial intelligence space rattled U.S. technology stocks in January. Chinese startup DeepSeek unveiled an AI model that it claimed could rivals top U.S. platforms like ChatGPT, and most importantly, at a fraction of the cost to build and using lower-end chips. Markets reacted sharply negative on the news as the potential breakthrough challenges the prevailing assumption that cutting-edge AI requires massive investments in high-performance hardware. Since the initial announcement new reporting has come out suggesting that, 1) DeepSeek cost considerably more to build ($500mn+), and 2) it may have used OpenAI’s models. Ultimately, we think the headlines are more impactful than the end result and view this as a strategic buying opportunity.

Given the S&P 500’s heavy weighting in AI-related stocks, the market will be closely watching how this competitive landscape evolves in the months ahead.

Fixed Income Shake-up

“Safe” fixed income investing continues to be one of the most volatile investments given uncertainty over rates. In recent weeks fixed income funds have sold off as the belief that rates would move significantly lower in ’25 faded. In our view rates will continue to be elevated over the near-term which puts pressure on traditional corporate bond funds. In addition, given recent natural disasters along the coasts we are cautious in broad municipal bond strategies. We continue to encourage investors to focus on short duration and selective fixed income invesvesting.

Disclosures

This commentary reflects the personal opinions, viewpoints and analyses of the author providing such comments, and should not be regarded as a description of advisory services provided by Defiant Capital Group or performance returns of any Defiant Capital Group client. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Defiant Capital Group manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary.

This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.

The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.

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A word on risk

All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.

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