At the beginning of each year, investors often step back to assess the risks and opportunities that may develop in the year ahead based on their expectations for corporate profitability underpinned by the prospects for economic growth, inflation, interest rates, government policy, geopolitics, etc. Combining this “macro” view with our technical approach can provide a helpful context for making investment decisions.

The chart below illustrates that the U.S. equity market moves through expansion and contraction/consolidation cycles lasting roughly 16–18 years. Looked at this way, we see potential for the current cycle to last into the mid-2030s before another extended period of sideways consolidation develops. While multi-quarter pullbacks often develop along the way, the takeaway is to stay invested in the current longer-term uptrend.

The chart shows the performance of the S&P 500 Index from the 1920s through the end of 2024. It highlights a cycle of expansion and contraction 16 to 18 years in length since the end of the Great Depression. As shown by the four-year moving average, the index rose during periods of expansion and was flat or marked by declines during periods of contraction. The chart indicates that the current cycle of expansion appears likely to peak in the mid-2030s.

Source - RBC Wealth Management, Bloomberg, Optuma

Bull market cycles

The structural bull markets of the 1950s–1960s, 1980s–1990s, and 2010s–2020s are made up of smaller stair-step cycles that bottom roughly every four years, often near a rising four-year moving average. These four-year cycles are by no means symmetrical, with some cycles extending beyond the usual two- to three-year rallies followed by a 9- to 12-month correction, of which 1987 and 2007 are two examples.

What drives these cycles? Liquidity provided by central banks and the response to that liquidity by the economy and corporate earnings are the primary catalysts, in our view. Although returns vary significantly for each four-year cycle, during structural bull markets the average four-year cycle upside has been near 110%, while the average decline has been 23%. Interestingly, the 2020–2021 bull market (+120%) and 2022 bear market (-27%) line up with the historical averages.

We think the implication for the current cycle that bottomed in Q4 2022 is that equities should see further upside in 2025 with a corrective window likely in 2026. The current four-year upcycle bottomed in Q4 2022 at the rising red four-year moving average, and after breaking out to new highs in early 2024, it remains in an uptrend (see chart below).

The chart shows the S&P 500 Index from 1945 through the end of 2024, highlighting a shorter cycle three to four years in length, with major cycle lows occurring roughly every four years since World War II.

Source - RBC Wealth Management, Bloomberg, Optuma

Pause points

Once a market or security moves to new highs, one technical method to identify potential upside pause points is to take the prior trading range, in this case the 2022–2024 range, and multiply it by 1.618 and 2.618 (both derived from the Golden Mean). We appreciate this may seem like an odd way to forecast potential upside levels, but we are impressed by how often markets inflect near these arithmetic markers. Interestingly, the first 161.8% extension was where the S&P 500 and Nasdaq 100 Indexes stalled in July. While we expect a volatile H1 2025, the next upside level for the S&P 500 is near 7000 at the 261.8% extension level.

While this suggests to us further upside in 2025, after a two-year rally, the cycle may be at risk of maturing. The momentum indicator in the top panel of the chart has proven useful to track prior three- to four-year market cycles. After bottoming in Q4 2022, that indicator transitioned into overbought territory and could be at risk of turning negative in 2025. What could cause the current equity cycle to peak? Higher bond yields are often the culprit. While our expectation is for the U.S. 10-year yield to trade in a band between 3.25% and 5%, a move above 5% would likely be a catalyst for the current equity cycle to peak.

The chart shows the S&P 500 Index from 2008 through the end of 2024, highlighting market momentum derived from analysis of periodic trading ranges.

Source - RBC Wealth Management, Bloomberg, Optuma

Tracking market breadth

Looking beyond the S&P 500, a major concern for investors has been the narrow leadership in a handful of large growth stocks.

The S&P 500 Equal Weight Index and NYSE cumulative advance-decline line (see charts below) remove much of the distortion caused by the surging mega-cap growth stocks and provide a gauge of how the average smaller stock is behaving.

Until late December 2024, participation (as measured by the S&P 500 Equal Weight Index and the number of stocks advancing versus declining) had been improving since Q4 2023. The key takeaway from these charts is that while a near-term pullback is underway, their trends remain positive with support beginning near their rising 40-week moving averages.

A break below the rising 40-week moving average would be of greater concern, in our view. This break was the negative technical signal that developed for the NYSE cumulative advance-decline line in Q1 2022 at the beginning of the bear market (indicated by the blue arrow). Here again, we view a move above 5% by the U.S. 10-year yield to be the main risk to the maintenance of the uptrend.

The chart shows the S&P 500 Equal Weight Index and the NYSE cumulative advance-decline line (both on a weekly basis) since mid-2020. These metrics minimize the effects of narrow market leadership by a few mega-capitalization growth stocks. Trends for both metrics remain positive despite a near-term pullback

Source - RBC Wealth Management, Bloomberg, Optuma

Key levels for interest rates

With interest rates playing a dominant role in how investors value asset classes, the trend for the U.S. 10-year bond will remain a major technical focus for us through 2025.

As noted earlier, the major catalyst for equity market participation to broaden in Q4 2023 was the U.S. 10-year yield peaking at 5%, before trending lower within a range through 2024.

Our base case is that the 10-year yield will remain in that 3.25%–5.00% range through most of 2025 with one- to two-quarter swings likely to define the trading range. To track these swings, we use a simple momentum indicator (bottom panel in the chart below) which has proven useful for identifying turning points through 2024. Our expectation is that this indicator will develop another tactical peak in early Q1.

Risk: We continue to view the band between approximately 4.7% and 5.0% as an important upside threshold, and while our base case is for rates to peak under that level, we think a move above that range would signal an important breakout with the next upside level just below 6.0%, corresponding to a 161.8% extension of the 2024 trading range. As noted earlier, a move above 5% is likely to exert meaningful downside pressure on equity markets.

The chart shows the yield on the 10-year U.S. Treasury bond since mid-2021. Since the fourth quarter of 2023, the yield has been a range of 3.25% to 5.00%.

Source - RBC Wealth Management, Bloomberg, Optuma

Sector rotation

We think of equity sectors as falling within three main categories: structural growth, cyclical growth, and defensive.

Given the S&P 500 is dominated by large-cap growth stocks, notably in Technology and Communication Services, our technical outlook for structural growth stocks aligns with our outlook for the S&P 500 discussed above. In short, these growth stocks remain in positive trends but are, in our opinion, less timely for establishing new positions at current levels following very large two-year advances.

Cyclicals, those sectors that are the most responsive to the underlying economy, tend to be volatile, with one- to two-quarter rebounds followed by choppy, multi-month trading ranges. The S&P 500 Industrials and Financials sector chart below illustrates these multi-month swings from within a longer-term bullish uptrend that accelerated in Q4 2023 after interest rates peaked at 5%. After pausing through H1 2024, cyclicals rallied strongly through Q3 into Q4 of this past year, with the post-election rally leading both sectors to peak near technical extension levels. While both sectors remain in longer-term uptrends, the technical backdrop suggests to us that investors should remain patient for better entry points in Q1.

Lastly, defensive sectors, such as Utilities, Consumer Staples, Health Care, and Real Estate, have dramatically underperformed the S&P 500 since the bull market began in Q4 2022. While we see no evidence of a relative performance reversal developing for these areas, a growing list of what we view as defensive stocks is becoming oversold, and with the S&P 500’s cycle momentum becoming advanced, we expect to see more timely opportunities developing in these sectors moving through the first half of 2025.

The chart shows the S&P 500 Industrials and Financials sector sub-indexes since 2021. Both sectors have been in a general bullish trend that accelerated in the fourth quarter of 2023. After pausing in the first half of 2024, both rallied through the end of the year.

Source - RBC Wealth Management, Bloomberg, Optuma

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