Veteran analyst Jurrien Timmer shares insights on why the US stock market rally may continue into 2025, driven by earnings growth and broader participation across sectors, despite challenges from high valuations and market risks.

The US stock market has seen impressive growth over the past two years, with the rally ongoing into 2025. Fidelity Investments’ global macro director, Jurrien Timmer, believes that sustained earnings growth and a strong economic environment will continue to fuel positive performance, although investors should temper expectations compared to the substantial 2024 returns. Timmer highlights that valuations are now stretched, which could limit the additional upside seen from inflated price-to-earnings ratios over the past year. In 2024, the 28% return on the Morningstar US Market Index was driven by robust earnings and increasing premiums paid for profits, but this boost may not repeat in 2025. One notable area of investor focus is the “Magnificent Seven,” a group of AI-driven mega-cap technology stocks, including Nvidia, Apple, and Microsoft. While their valuations are elevated, Timmer asserts they remain justified due to significant earnings growth, arguing that current trends don't resemble a speculative bubble. Furthermore, the market rally has broadened beyond these key names, with over three-quarters of S&P 500 stocks trading above their 200-day average, signalling a wider participation across sectors. Timmer observes that, contrary to traditional bull markets narrowing with age, this cycle is broadening, which he perceives as a positive sign. However, risks remain. A potential stumble by the heavily weighted Magnificent Seven could pull index averages lower, even if many other stocks are performing well. Another factor to monitor is inflation; should economic growth outpace stabilised inflation rates, rising bond yields could create drag on the markets. Additionally, unexpected geopolitical or macroeconomic developments may pose challenges. Timmer advises investors to diversify portfolios, avoiding reliance on specific sectors or short-term trends. He suggests exploring alternative strategies like equal-weighted investments, small caps, or international markets to balance risk and seize opportunities. As the market dynamics of bonds and stocks evolve, the traditional 60/40 portfolio mix might no longer suit all investors. Looking ahead, maintaining balance and adaptability within portfolios appears crucial for navigating an increasingly complex market environment.