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Executive Summary
The closing months of 2024 revealed three clear trends shaping markets in early 2025:
- AI technology continues to drive market performance, with the Magnificent Seven delivering 48% returns while reshaping business efficiency, but longterm stability questions looms with the release of China’s DeepSeek competitor to OpenAI’s ChatGPT and Anthropic’s Claude.
- Recent executive orders signed by President Trump signal major shifts in ESG and sustainability investing that Values-Based Investing can solve for.
- Despite market concentration, strong earnings growth and reasonable valuations suggest continued momentum into 2025.
The Tale of Two Markets: Understanding 2024's Market Divergence
Record-Breaking Performance
The S&P 500's impressive 25% advance in 2024 pushed the index to new heights, sitting 163% above its March 2020 COVID-19 low and 23% above its January 2022 peak. However, these broad metrics mask a remarkable divergence within the market.
The Magnificent Seven's Dominance
The "Magnificent Seven" (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta) surged an astounding 48% with projected Q4 earnings growth of 21.7%. In contrast, the rest of the market delivered more modest but still solid growth of 10%, with earnings growth of 9.7%.
AI Market Disruption
Recent events have highlighted the dynamic nature of technology markets. The AI sector experienced significant volatility when Chinese innovator DeepSeek introduced a platform claiming superior performance at lower costs. While this news initially triggered a sharp downturn in AI-related stocks, the subsequent rebound in Semiconductor, Nuclear, and Utilities companies demonstrates the market's resilience and adaptability.
Three Critical Market Forces Shaping 2025
1. AI's Transformation of Business Fundamentals
The AI revolution is delivering tangible, measurable productivity gains across industries. Perhaps the most striking example is in financial services, where AI can now complete 95% of an IPO filing in minutes – a task that traditionally required two weeks of analyst work. This dramatic efficiency improvement helps explain why the Magnificent Seven have gained such influence in global markets, with U.S. companies now representing 67% of the MSCI All Country World Index.
2. Policy Shifts Reshaping ESG Investment Landscape
President Trump's climate-related and diversity, equity, andinclusion (DEI) Executive Orders issued on January 20, 2025, are poised to influencethe commitment of the country, corporate America, and largemanagers to further progress on environmental, social, and governanceissues.
The key edicts include:
Withdrawal from the Paris Climate Agreement. The order to withdraw from the Paris Agreement and other international climate commitments may reduce federal support for renewable energy projects and climate initiatives, potentially affecting investments in sustainable technologies.
Elimination of the Electric Vehicle Mandate. A separate order rescinded federal requirements mandating the adoption of electric vehicles by automakers and their customers. This could reduce incentives for transitioning to EVs by eliminating emissions requirements for auto and truck manufacturers, incentives for EV purchasers, and the construction of EV charging infrastructure, likely slowing innovation and investment in sustainable transportation.
Elimination of Diversity, Equity, and Inclusion (DEI) Programs. The end of DEI initiatives within the federal government may prompt corporations to reassess their commitments to social equity and inclusivity. This mandate could be particularly problematic for government contractors.
Redefinition ofGender Policies. By restricting federal recognition to only two sexes (male and female), companies may face challenges in maintaining inclusive workplace policies, a critical factor in social and governance assessments.
As the Executive Orders and their consequences are assessed, we believe the best way forward for values-focused Advisors and their clients is to emphasize education, accessibility, transparency, and personalization in in their interactions, and portfolio management, proxy voting, and corporate advocacy efforts. Our Values Aligned Direct Index Solution (VADIS) and proxy voting and advocacy efforts enable advisors to educate their clients and work with them to identify the Values Set best aligned the client’s view of the world, incorporate those Values into the client’s personal Investment Universe, and construct a portfolio and advocacy plan targeting the client’s long-term financial and impact objectives.
3. Strong Foundation for Continued Growth
Despite recent changes, analysts remain optimistic about corporate earnings growth through 2025. Projections show accelerating S&P 500 earnings growth:
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U.S. Market Leadership: Understanding Global Market Dynamics
Historical Performance
The United States' market dominance has reached historic levels, with U.S. equities delivering 13.9% annual returns over the past 15 years. This significantly outpaces both developed international markets (5.7%) and emerging markets (3.9%).
Global Competition
In 2024, only Taiwan managed to outperform the U.S. market, primarily due to TSMC's leadership in the semiconductor industry. This highlights the importance of semiconductor technology in driving market performance.
Looking Ahead: Strategic Considerations
As we progress through 2025, investors face a market environment that combines tremendous opportunities with significant challenges. The rapid pace of technological change, shifting policy landscapes, and evolving market dynamics create a complex environment that rewards careful analysis and strategic thinking.
Key Takeaway
Remember: While the market reflects the world as it is today, values-aligned investors have the opportunity to invest in the world as they want it to be, pursuing both long-term financial returns and meaningful impact aligned with their values.
Discover more helpful resources about Values-Based Investing here.
For more detailed analysis and insights, including specific sector performance and detailed market metrics, please visit First Affirmative Financial Network.
Important Disclosures:
The opinions and concepts presented are based on data believed to be reliable; however, no assurance can be made as to their accuracy. Mention of a specific company or security is not a recommendation to buy or sell that security. Past performance is never a guarantee of future results. For information regarding the suitability of any investment for your portfolio, please contact your financial advisor.
The views expressed herein are those of First Affirmative and may not be consistent with the views of individual investment advisors or Broker-Dealers or RIA firms doing business with First Affirmative. Network Advisors may offer securities through various Broker-Dealers and Registered Investment Advisory firms. These affiliations, and all fees charged to clients, are clearly disclosed. First Affirmative’s ADV Disclosure Brochure is available any time. Please write or call for a copy or visit firstaffirmative.com/about-us.
Copyright © 2025. A Publication of First Affirmative Financial Network, LLC, Registered Investment Advisor (SEC File #801-56587) • 5475 Mark Dabling Boulevard, Suite 320, Colorado Springs, CO 80918 • p: 719-478-7036 www.firstaffirmative.com
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