In our 4Q 2024 commentary we delve into the key drivers behind market performance, focusing on five key questions:
1. What is KAR’s view on the U.S. economy and equity markets as we head into 2025?
As we move into 2025, we see improved business confidence following the election results. The labor market remains solid with strong new hires and job openings, but inflation continues to be a concern especially in the services sector. Predicting the exact economic outlook remains challenging, given the complexity of these factors.
2. Do we expect the market to broaden out in 2025?
We saw some signs of market broadening in 2025, and we believe a further broadening could come from more widespread growth in EPS and/or higher valuations multiples in other sectors. Mid and small-cap stocks are also expected to benefit from investments in artificial intelligence.
3. What was the role of quality in the fourth quarter of 2024?
In the fourth quarter, lower-quality stocks outperformed higher-quality ones. This was largely driven by investor optimism about the new administration’s business-friendly stance on regulation and tax policies.
4. What is the earnings outlook for small caps?
The earnings outlook for small caps in 2025 remains uncertain, as a recovery in small cap earnings has been predicted for several quarters without yet materializing. With two years of double-digit earnings declines, small caps have a lower bar to achieve earnings growth compared to large cap stocks.
5. What is KAR’s outlook on valuations?
High valuations have been concentrated in the technology sector and parts of consumer discretionary, which we see as outliers. We believe that the market overall isn’t as expensive as headline numbers might imply and that there are still opportunities for fundamental investors.
