When markets are performing well, it’s often the right time to consider bearish scenarios. Here is a look at what could go wrong in 2025:

1. Geopolitical shocks that push oil prices significantly higher or disrupt the global order. For example, a Chinese military action against Taiwan—while not oil-related—would likely have a negative impact on global stock markets.
2. A shift in the Fed’s rate policy, particularly if inflation resurges. This could lead to a reversal of the current trend of rate cuts, weighing heavily on equities.
3. Concerns about global growth, which can limit stock returns and create a bear market-like atmosphere even when US large-cap stocks post modest gains. We saw this in 2011 (during the Greek debt crisis, when the S&P 500 had only a 2.1% total return) and again in 2015 (amid a worldwide growth scare, with the S&P returning just 1.4%).
4. Corporate fraud at once-respected companies. One under appreciated factor in the 2000-2002 bear market was the unraveling of Enron (2001) and WorldCom (2002). Both were tech darlings of the late 1990s but were later exposed for massive accounting fraud. The fallout from their collapses deeply damaged investor confidence in corporate governance and accounting standards.
5. Founder risk. Visionary entrepreneurs like Elon Musk have significantly shaped the valuations of companies like Tesla and SpaceX. While his role is undeniably impactful, the concentration of so much market value in a single individual can create a risk. Historically, after JP Morgan’s role in saving the capital markets during the 1907 crash, the US government established the Federal Reserve, recognizing the danger of relying too heavily on any single individual.
6. The volatility of virtual currencies. Cryptocurrencies, with a total market value of $3.6 trillion, have created immense wealth for investors but are notoriously unstable. The rise of exchange-traded funds in this space means that a sharp decline in crypto values could spill over into broader financial markets. A similar phenomenon played out during the dot-com bubble of the late 1990s.
7. A surprisngly stronger US dollar. With the dollar recently appreciating, there is potential for it to strain non-US economies. Oil is priced in dollars, and a sudden 5-10% jump in the dollar could significantly impact global growth expectations. If the dollar strengthens too quickly, it could present a serious risk to the global economic outlook for 2025.
8. An overshoot in US equities, leading to a sharp correction. It’s worth noting that there are periods when equities can become disconnected from underlying fundamentals. The late 1980s provide a historical analogy: from 1985 through September 1987, the S&P 500 more than doubled, only to crash in October 1987. No recession followed, and the market rebounded to new highs, but the period was marked by significant uncertainty.

While mid-cycle markets are often characterized by solid equity returns, they also come with their own set of risks. This list isn’t meant to cause alarm, but rather to illustrate the potential “bricks” in the proverbial “wall of worry” for the year ahead. We are active managers and will adjust our portfolios to protect profits if required. If you feel like stocks are in bubble territory, take a look at the chart below. This overlays the 1995-2000 tech bubble, with the current bull market that started two years ago in 2022.

Should you have any questions or concerns, please feel free to reach out.

Portfolio Notes

(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral

(+) Alphabet (GOOGL-US) The online search giant operator launched its latest quantum chip, called Willow. Alphabet said this marks a major breakthrough in the field of quantum computing, leading shares higher. Quantum computing is considered as the next frontier for many tech companies. Its blog post claims that a quantum computer powered by its new chip, Willow, solved a mathematical equation that would take a classical supercomputer 10 septillion years to solve. And it did it in only five minutes. Competitors like IBM, Intel, Amazon, Microsoft, and Honeywell are also chasing the next major technological breakthrough in this space. The industry largely believes this tech has “promising applications in many fields,” though we’re still far from seeing those practical applications. Nonetheless, the world is racing to be the leader in this space, and the U.S. does not want to fall behind. In 2018, the National Quantum Initiative Act pledged $1.2 billion in federal funding for this space, and senators are looking to authorize another $2.7 billion. Meanwhile, China is reportedly spending more than $15 billion on its own quantum computing research. Owned in Core and ESG+ Portfolios.

(+) Costco Wholesale Corporation (COST-US) reported solid 1Q25 results with a revenue and EPS beat. Top-line was largely as expected given the timing impacts disclosed in November SSS numbers. Gross margins ex. membership fees exceeded expectations in the quarter driven by core margins up 30 bps while management noted that they will continue to invest in price following the membership fee increase. Both US/Canada and worldwide renewal rates fell 10 bps q/q due to digital sign up mix which the company expects to continue moving forward. The company noted that they plan to open 20 more clubs this year (annual run rate of 30) with half of those being international. COST’s share price is up ~50% year-to-date, outperforming the S&P 500 owing to high membership-renewal rates, and steady sales growth with consumers continuing to seek value. Moreover, membership fees account for over 70% of COST’s total operating profit, allowing the company to undercut retailers on price. Hence, the stock trades at a forward P/E multiple of 54x, a premium to its historical long-term average of 33x. COST’s value proposition (high quality at low prices) is driving membership growth and traffic and taking share from peers. We would continue to own the stock. Owned in Core and ESG+ Portfolios.

(+) Tesla (TSLA-US) It took 1,133 days, but Tesla shares finally hit a new high eclipsing the prior split-adjusted high of $409.97 reached on Nov. 4, 2021. The stock is up about 69%, or $173 a share, since the Nov. 5 U.S. presidential election, adding some $555 billion to the EV maker’s market value. Wall Street, meanwhile, has struggled to keep up, with target prices increasing by just an average of about $40 a share over the same period. Tesla’s market value now sits north of $1.3 trillion, more than $100 billion higher than the 2021 high. The company’s market capitalization surpassed its 2021 high on Tuesday, earlier than the new stock price high because it has more shares outstanding now. Owned in ESG+ Portfolio.

(~) UBER (UBER-US) It's been a very bumpy ride for shareholders lately with shares skidding lower since mid-October as concerns about slowing rideshare growth and the possible impact that robotaxis may have on its business have weighed on sentiment. On the former point, the company provided an upbeat outlook for its Mobility segment during this week's Barclays Conference, forecasting mid-to-high or low-twenties growth for the first three quarters of FY25. For a reference point, gross bookings for Mobility grew by 24% on a constant currency basis in 3Q24. Badly in need of some positive headlines that could stem the stock's steep selloff, the Barclays Conference provided UBER with a forum to spin a more positive narrative. The company's updated guidance, including its expectation to grow adjusted EBITDA at a 40% clip from 2023-2026, did just that, helping the stock to reverse course and move higher. Owned in Core, ESG+, Us and Opportunity Portfolios.

Company of the Week: Alphabet

MEET WILLOW

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