The U.S. equity market has shown remarkable strength throughout 2024, with a 57% two-year gain for the S&P 500 a performance not seen since the late 1990s. With a market-friendly administration taking office and bullish momentum persisting, the conditions appear favorable for continued equity growth in 2025. However, the market’s extended rally introduces challenges for new entries, making potential pullbacks a crucial consideration for traders.

Balancing Risks and Opportunities

Investors face two primary options: enter a stretched market with the hope of continued gains or wait for a pullback to a support level for a more favorable entry point. Each approach carries risks:

• Entering Immediately: This strategy risks sub-optimal entry points and potential stop-outs if a pullback occurs, even in a long-term uptrend.
• Waiting for a Pullback: While this offers better risk management opportunities, it comes with the uncertainty of whether a pullback will materialize and the risk of further declines if support levels fail.

The pullback scenario is more appealing for disciplined risk management. By waiting for retracements to key support levels, traders can define stop-loss placements more effectively, reducing reliance on a “buy and hope” strategy.

Psychological Challenges in Trading

Market psychology often influences trading decisions. Fear of missing out (FOMO) can push investors to enter prematurely, while the emotional impact of losses may lead to self-doubt. Experienced traders understand that forecasting market movements is inherently uncertain. Analyzing available data and identifying trends are crucial for making informed decisions without succumbing to market euphoria or panic.

Key Levels to Watch in 2025

The S&P 500 currently trades near a gap created during the U.S. Presidential election, about 5% below current levels. This gap represents a potential pullback target. Below that, prior resistance near the 161.8% extension of the 2022 pullback around 7% lower offers additional support. If the retracement exceeds 7%, it may indicate a fundamental shift, possibly driven by long-term interest rate concerns.

In such a scenario, the 5,340-5,400 zone could serve as a critical area for buyers to defend, aligning with an approximate 11% pullback. A successful defense of these levels could set the stage for further upside potential.

Broader Market Context

Despite risks, the long-term outlook for U.S. equities remains positive. Factors such as inflation normalization and the Federal Reserve’s policy decisions will play pivotal roles. Unless inflation re-accelerates, forcing aggressive rate hikes akin to early 2022, the Federal Reserve’s implicit support for stable stock prices is likely to persist.

The overarching lesson from the past decade particularly since the Financial Crisis is that major stakeholders generally align in favor of rising equity markets. While challenges such as elevated Treasury issuance and yield curve normalization present risks, the market’s resilience and adaptability suggest continued opportunities for growth.

Conclusion

The U.S. equity market’s strong performance in 2024 sets a bullish tone for 2025, but traders should remain vigilant for potential pullbacks. By focusing on key support levels and maintaining disciplined risk management, investors can navigate the opportunities and challenges ahead with greater confidence. As always, flexibility and adaptability will be essential in a dynamic market environment.