Positive January Barometer
The rally broadens.
Bottom Line
Stocks posted a strong 2.7% price-only gain for the S&P 500 for the full month of January, reversing course after a choppy start. Such a positive reading for the January Barometer has historically augured well for the equity market’s full-year investment performance. This time around, investors seemed to have ignored negative S&P readings for both the Santa Claus Rally indicator (down 0.53%) and the adjusted Early January Barometer indicator (down 0.93%), suggesting that stocks could well achieve our constructive outlook for 2025.
January Barometer positive According to the January Barometer, one of the stock market’s most popular and widely followed rules of thumb, as the month of January goes, so goes the full year. Since 1950, Jeffrey and Yale Hirsch at the Stock Trader’s Almanac report that the performance of the S&P 500 in the month of January—positive or negative—is an accurate directional signal for the full-year performance of the stock market 73% of the time (55 out of 75 observations). But when January is a positive month, as it is this year, the odds of a positive full year rise to nearly 89% (40 out of 45 instances).
When investors burst out of the gate, they usually keep galloping Since 1950, there have been 30 instances in which the S&P rallied 2.7% or more in January, and the index finished the year in positive territory 90% of the time (27 out of 30 observations), with an average full-year return of 18.7%.
The first year of a president’s new term tends to be choppy. In the 18 post-presidential election years since 1950, January started the year negative half the time, with a positive average return of 0.66% for the month and a positive 7.91% for the full year. But in the nine instances in which January was positive, the full year was also positive 89% of the time, with an average return of 21.6%.
Fundamentals still matter The S&P has enjoyed two powerful years in a row, rising 24.2% on a price-only basis in 2023 (26.3% on a total-return basis) and 23.3% in 2024 (25.0% total return). We’re not expecting a 20%-plus three-peat in 2025, but our target is not far removed, at a 19% price-only gain taking it to 7,000.
With the new administration and Congress, we’re excited about the prospect for more market-friendly fiscal policies out of Washington over the next 15 months. These could include reduced regulations, increased energy exploration and production, lower inflation, increased government efficiency and permanently lower corporate and individual tax rates, in conjunction with gradually declining interest rates from the Federal Reserve.
Consequently, we’re expecting economic growth to increase toward a trendline 3% in 2026, with corporate earnings rising to $310 in 2026 and $350 in 2027. Our expectation for gradually lower interest rates and declining inflation translates to our target price of 7,000 for the S&P by year-end 2025 and 7,500 in 2026.
What might be best sectors to own in 2025? The January Barometer portfolio indicator also holds that the best- and worst-performing of the 11 S&P sectors in January tend to follow that performance the rest of the year. Here are the sectors arranged by total return from December 31, 2024, through January 31, 2025:
- Communication Services, 9.12%
- Health Care, 6.79%
- Financials, 6.56%
- Materials, 5.59%
- Industrials, 5.03%
- Consumer Discretionary, 4.41%
- Utilities, 2.93%
- S&P 500, 2.78%
- Energy, 2.07%
- Consumer Staples, 2.04%
- REITs, 1.84%
- Information Technology, -2.90%
Results mixed The worst sector, by far, was Information Technology. Its dramatic underperformance suggests some profit taking and a reversion to the mean for three of the Magnificent Seven’s technology behemoths. But the best-performing sector, Communications Services, and the solid Consumer Discretionary each include two Mag 7 stocks. Sprinkled in among the outperforming sectors are Health Care, Financials, Industrials and Utilities, which have been our favorites over the past few quarters and are enjoying a tailwind from the catch-up trade.