If the old saying, "as January goes, so goes the year," proves true in 2025, stock market investors could be looking at three straight years of gains.
In the first month of 2025, stocks shot up despite a slew of headlines that amounted to a bull market in uncertainty. President Trump returned to the White House. The Federal Reserve left interest rates alone and indicated cuts this year may not happen after all. Chinese artificial intelligence company DeepSeek put U.S. AI companies on notice that they are in the race, too.
And on the final day of January, Trump said he's following through with tariffs on imports from Canada, Mexico, and China. (The president has since put a pause on tariffs for 30 days for Canada and Mexico as they work out a deal.)
Through it all, the U.S. stock market continued to go up. The S&P 500, building on back-to-back years of 20%-plus gains, rose 2.78%. Small- and mid-cap stocks shot up, too.
The upside? The average U.S. diversified equity fund posted a 3.43% gain, according to Lipper Refinitiv data.
Will 2025's Stock Market Follow January?
The so-called January barometer, which says an up January typically leads to positive returns for the year, has been correct 70.8% of the time since 1929, says Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. It worked last in 2024 when a 1.59% gain in January led to a full-year return of 23.31%, he says.
The DeepSeek news, though, cooled off the red-hot Nasdaq. The technology-filled index, hurt by monthly declines suffered by Apple and Nvidia (which suffered a one-day crash of 17% due to a rethink of its AI dominance and high valuations), gained 1.66%, lagging the S&P 500 and the Dow Jones Industrial Average, which rallied 4.70%.
January was one of those months everything was up. Growth funds rose. Value funds popped. Small-cap funds posted sizable gains and midcap funds finished in the green, too. Equity income funds, which invest in dividend-paying stocks, flashed green, too.
In the big-cap space, value funds won the performance derby, rising 4.32%. In midcap land, it was growth funds in the lead, rallying 5.43%. The 3.86% gain of small-cap growth funds was nearly double the 2.22% rise in small-cap value.
World equity funds rallied 3.47%, giving proponents of international diversification something to cheer.
Beyond The Big Caps In The Stock Market
Diversifying with bond funds paid off, too. General bond funds ticked 0.63% higher and core bond funds, which invest in investment grade Treasuries, corporate debt and mortgage-backed securities, rose 0.57%. Investors going farther out on the risk scale fared well, too, with high-yield funds (which invest in so-called junk bonds, or below investment grade) gaining 1.29%. Inflation protected bond funds gained 1.19%. World income funds were up too, gaining 1.32%.
January was a so-so month for science and technology funds, which took a late-month dive on the DeepSeek news and were also hurt by the steep decline of megacap Nvidia. Tech funds did rise 3.70%, but they lagged health and biotechnology funds' 5.62% gain, financial services 5.47% gain and consumer services 5.13% advance.
Andy Acker, a health care portfolio manager at Janus Henderson, says innovation continues to drive investment opportunities in health care. Despite innovations such as GLP-1 weight loss drugs and robotics surgery and atrial fibrillation devices that tap large markets, he says health care stocks have had several years of relative underperformance and are trading at "discounted valuations."
The AI Stock Market Boom Continues
But the message from Wall Street is don't give up on the AI buildout and long-term trend. "We believe the AI growth story remains intact," said Solita Marcelli, chief investment officer Americas at UBS Financial Services.
"While the DeepSeek indicates China is likely to remain a strong force in AI innovation, we do not believe that its emergence materially changes the growth outlook for the industry or key parts of the (AI) value chain," Marcelli noted. "AI is here to stay."
James Demmert, chief investment officer at wealth management firm Main Street Research, isn't giving up on AI names he's bullish on. He likes Constellation Energy. This energy company is one of the independent power producers that provides nuclear power. "It's a utility grid expansion company," said Demmert. "It's helping the world meet its increasing energy needs." And it's only selling at 22 times earnings, which is a reasonable valuation given its growth prospects, adds Demmert.
Another AI play Demmert likes is SAP, the German-based CRM (customer relationship management) software company. "Over the past year, SAP is harnessing the power of AI through their rapid investments in chips," said Demmert. It also trades at 22 times earnings. But SAP has another thing going for it: "It's a great way to play a foreign stock that we think will be spared by Trump tariffs," he said.
Thinking Contrarian
In January, the top-performing fund in IBD's Top 25 was Fidelity Contrafund (FCNTX). Veteran fund manager Will Danoff, who has managed the fund for more than 34 years and has topped 91% of his fund's peers this year and nearly all (97%) over the past three-year period, had six of the Magnificent Seven stocks in his top-10 at the end of last year, according to Morningstar.
The second-best fund in IBD's Top 25 in January was American Funds Growth (AGTHX), which gained 5.17%.
What was interesting last month is Vanguard Total Stock Market fund's (VGTSX) 3.09% gain topped its S&P 500 index fund's 2.77% return. That's a sign of a broadening market as the total stock market fund also includes small- and mid-cap stocks, not just large caps.
Watching Trump Tariffs
For now, Wall Street is taking Trump's tariff threats in stride. But it's likely to be a continuing story that bears watching, David Kelly, chief global strategist at J.P. Morgan Asset Management, told clients in a note.
For now, there's lack of clarity about what the outcome will be, and things could change quickly.
"It is completely unclear what the end game of the trade war could be," said Kelly. "Experience from (Trump's) first term and the first (few) weeks of his second suggest that policy uncertainty could persist."
Market volatility provided a lift to bonds in January, as investors flocked to fixed income in a flight to safety move.
While uncertainty is likely to plague markets until Trump's policies get implemented and better known, bonds will play a key role in investment portfolios.
Leslie Falconio, head of taxable fixed income at UBS Global Wealth Management, says investors will continue to get a decent return due in large part to the sizable yields that remain. The extra spread investors get on riskier bonds is a smaller part of returns now with yields so high.
"The yield earned across fixed income is the primary driver of total returns," said Falconio. "We maintain a favorable outlook for higher-quality sectors such as agency mortgage-backed securities (MBS), investment grade corporates and five-year Treasuries."
