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By most measures, 2025 looks pretty good for stocks.

The Fed has begun a rate-cutting cycle that should last for the next two years. Historically, stocks do well when the Fed is cutting rates and there is no recession. And the economy has been solid. This bull market is just 25 months old and has returned 65%. Bull markets usually don’t just run out of gas after two years. In fact, the average bull market has lasted 50 months and returned 152%.

But stocks are expensive. The S&P currently sells at 22.3 times forward earnings compared to an average of 16 times over the last twenty years. The market returned 26% in 2023 and about 28% this year with two weeks to go. It might be tough for stocks to deliver another consecutive year of 20%-plus returns.

It may be that a lot of the easy upside is behind us. Stocks can still perform well, but they’ll probably have to earn it in 2025.

In this issue, I highlight a stock that is poised for a strong earnings rebound in 2025. It is a stock that bounces a lot between the highs and lows. And it is currently well below the high. It is also one of the best healthcare companies on the market at a time when the population is older than ever before and aging at warp speed.

The markets are reacting to the inflation report, hot off the press. Core CPI was 3.3%, just as economists had predicted. That bodes well for the upcoming Federal Reserve meeting, where most experts forecast another 25-basis-point reduction.

Over the past month, the markets surged following the election but have pulled back in the last few days. While I think we may see some small pullbacks in the next month or so, I’m still bullish but think strategic buys—not dartboard throwing—are the method to boost portfolio returns.

The markets saw mostly sideways action in the past month—the soothsayers are still debating when the Fed will begin reducing interest rates. Growth stocks held on to their leadership position, although value stocks are beginning to show life in 2024.

The markets traded sideways through most of April. But since then, the choppiness has returned—along with worries about the uncertainty regarding the debt ceiling, the expiration of the immigration-limiting legislation, and ongoing debate about the possibility of a recession.

Yet, economically speaking, the trends are still healthy. Manufacturing has held up, employment continues to rise, and job openings are still underutilized (as you can tell if you’ve been in a restaurant lately!).

It’s still a narrow rally at this point, but we are seeing more names begin to pop higher, whether on earnings or some other news, with some shakeouts-and-recoveries, some earnings gaps that see immediate follow-through and more names setting up. (We don’t hate the selloff in defensive stocks, either.) It’s not definitive yet, but we will nudge the Market Monitor up to a level 5 and see how it goes.

Growth names make another good showing this week, with a variety of sectors (outside of retail, which has been rough) represented. Our Top Pick is a big-cap chip name that has stormed back after a spring correction.

The market has been in something of a takeoff or lockout rally, but near-term, we’re finally seeing some profit taking set in; coming into today, the Nasdaq was 9% above its 50-day line, so some wobbles are to be expected. Even so, we’re not changing our advice any at this point—we like to play the odds, and right now the odds favor (a) near-term trickiness but also (b) that pullbacks should generally lead to higher prices. We’ll leave our Market Monitor at a level 7 and see how it goes.

While growth could be set for a dip, the broadening of the rally is seeing more non-growth names actually show strength. Our Top Pick is one of many cyclical-type stocks that, after a big hiccup in March with the banking worries, has come alive amidst a vacuum of selling pressure. Dips of a couple of points would be tempting.

I launched Cabot Dividend Investor five years ago to help investors like you build a balanced portfolio of reliable dividend-paying stocks. It’s been a great journey, and I hope you’ve learned a lot and have made some money.
Cabot Dividend Investor isn’t going anywhere, but it’s time for me to move on. I’m excited to pursue new opportunities in the New Year, and I’ll be leaving you in great hands. Tom Hutchinson, the new Chief Analyst of Cabot Dividend Investor, will introduce himself in this month’s issue, with his take on the market and an exciting new stock pick.
But before I turn everything over to Tom, I’m going to wrap up a few loose ends in the portfolio—some things have unraveled a bit over the past month.

These few companies found in today’s issue are newsworthy, and lots of people are pondering buying and selling these stocks, so let’s get a firm grasp on whether the stocks warrant your attention.

SThe story of the broad market is much the same as it has been in recent weeks. To wit, rotation continues across several industry groups while the major averages remain stuck in a lateral range. Things should start to heat up as we head further into the earnings season, though we’re not advising any major change in stance just yet.

This week’s list includes a nice mix of key industries that are benefiting from major fundamental and economic trends. Our Top Pick is a stock that should get a boost from accelerating interest in online foreign language learning.

We continue to see some near-term tremors, but beyond that, the evidence looks pretty great, both from a top-down perspective and, even more so, among leading stocks, which continue to behave themselves, with a lot of controlled pullbacks and tight action among those that have dipped—while many others are still pushing higher. All in all, we’re encouraged, though for the moment we do think it’s best to pick your spots. Our Market Monitor stands at a level 7.

This week’s list has another balanced collection of ideas, with many different sectors and types of stocks. Our Top Pick is one of many turnaround-type retailers that’s cheap, has new-ish management and should have solid growth ahead—and the stock is perking up, too.

Hopefully, by the time you read this, the government shutdown will be over (at least for a couple of months). It’s about time! I was lucky on my trip to Florida a couple of weeks ago that I only sat on the tarmac for two hours, as things certainly have become much worse for travelers around the country since then.

Who knows if Congress will work out the kinks by January, but at least it’s some progress.

The market has handled itself well during the past couple of weeks, consolidating normally, with our intermediate-term indicators still positive, which is all to the good. Still, leadership remains somewhat lacking and, while coming close, our Cabot Trend Lines are still negative, so we’re content to take things step by step while waiting for more institutional-quality names to get going. Tonight, we are extending our line a bit more, but will hold onto a 36% cash position and want to see added upside confirmation before we put too much more money to work.

Insurance costs have been rising for years, even rapidly outpacing inflation in many areas, and households are feeling the pinch of higher prices. This month, let’s take a closer look at why the costs to insure your home and autos are rising and what you can do about it. We’ll explore who’s paying these higher prices, comparison shopping for new or replacement policies, and the other steps you can take to keep your costs manageable.

While the volatility continues, the markets made some upward progress since our last issue, with all the broad indexes rising—although both Growth and Value stocks are still negative, year to date.

Sector-wise, all sectors— except for Energy (-6.02%), Technology (-7.34%) and Consumer Discretionary (-11.17%)—are in the black, led by Utilities (+5.10%), Consumer Staples (+3.66%), and Real Estate (+2.98%).

The Federal Reserve meets this week, but most economists expect no change in interest rates (for now). We’ll see how inflation is faring next week, which should give us some insight as to future Fed action and whether or not we can anticipate any rate relief this summer.

As we wind up the first half of the year, the market has a great setup in place—in fact, it’s looking like that’s what’s been going on for the past six or seven months, with the big-cap indexes etching their own launching pads. Combined with some big-picture positives (like still-dour sentiment), we continue to think the next big move is up. And, while it’s not completely decisive, we’re finally starting to see some growth stocks perk up, too. Thus, we’re taking another step into the market’s waters tonight, adding one new small position and averaging up on a current holding.

The Turnaround Letter has been acquired by the Cabot Wealth Network, a family-owned business based in nearby Salem, Massachusetts. Founded in 1970 by Carlton Lutts, Cabot is celebrating its 50th year in business, having served hundreds of thousands of investors. The company focuses exclusively on publishing high-quality investment newsletters and currently has a portfolio of 20 advisory services.

In this issue you’ll read about an energy company and a powerful catalyst for turnarounds.

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