Make the forecast wide enough and it might just be close.

Such was the case with interest rates. In mid-December 2023, traders priced in an 89% probability of the Federal Reserve’s federal funds rate being between 3.50% and 4.25%. The actual 2024 range turned out to be 4.25% to 4.50% after the Fed’s December 18, 2024, meeting.

As of press time, the CME FedWatch Tool shows traders anticipating just a few more interest rate cuts being made in 2025. They are pricing in a 66% probability of the target rate being between 3.75% and 4.25% following the December 10, 2025, meeting. We shall see.

Federal funds futures traders were far more accurate than stock market strategists. Among the 21 market strategists that Creative Planning’s Charlie Bilello surveyed at the end of December 2023, the average 2024 year-end target for the S&P 500 index was 4,861. The most bullish forecast was 5,400. However, the S&P 500 was trading near 6,000 as I wrote this.

At least the market strategists erred on the conservative side instead of being overly optimistic.

This year follows two very good years for the stock market. A reversion toward the 10.3% long-term average would suggest a comparatively rougher year ahead for the S&P 500.

There could be reasons for this to happen. Valuations are high for many large-cap stocks. The S&P 500 is extraordinarily concentrated, with the 10 largest stocks accounting for 36% of the index’s total market capitalization. The Fed could hit the pause button on further interest rate cuts. Tariffs could slow the global economy. Congress could end up being slower than anticipated in terms of passing President Donald Trump’s agenda. Other risks—both known and unknown—may also emerge.

History produces sequels of itself. Large-cap stocks have realized double-digit gains for three or more consecutive years on many occasions. Such periods include 1963–1965, 1995–1999, 2012–2014 and 2019–2021. This year could bring an avoidance of trade wars, further interest rate cuts, more monetization of artificial intelligence (AI) and a halt to fighting in Ukraine. Again, these are just things we are aware of.

Many forecasts are made during this time of year. Pay attention if you find them interesting, but do so with a high level of skepticism. Everyone is operating with cracked crystal balls. Plus, things we don’t expect to happen can occur. Whether those will be good, bad or neutral for the financial markets remains to be seen.

One of the great advantages we individual investors have is never having to report our annual or quarterly performance. Calendar-year performance matters far less than achieving our own long-term goals.

Look Past the Headlines for the Best Stocks

While Nvidia Corp. (NVDA) continued to attract significant attention last year, it was not the best-performing stock in the S&P 500. Intelligence software developer Palantir Technologies Inc. (PLTR) and electric power utility Vistra Corp. (VST) both had much larger year-to-date gains than Nvidia as we went to press in mid-December.

I point this out as an example of why you should look beyond the headlines when searching for potential stocks. Rather than relying on the investment media, use stock screens. These quantitative filters identify stocks with the traits you desire.

As a bonus, the AAII Stock Screens can help you diversify your holdings. In this issue, AAII president John Bajkowski looks at how much the returns realized in 2024 by the best- and worst-performing AAII screens could be explained by the S&P 500. In most cases, it wasn’t a large amount.

Much of this is attributable to the fact that the screens seek out stocks possessing specific characteristics. This results in stocks whose traits often don’t match that of the S&P 500 overall. Stocks passing the screens may have stronger earnings growth, a cheaper valuation and/or better price momentum. Simply put, they steer you away from the market portfolio. This is good because beating the S&P 500 means investing differently than it.

Bajkowski’s annual review of our stock screens, which are available to all AAII members, starts here.

Wishing you a happy, prosperous and healthy 2025,