This Year Has Been a Tale of 3 Markets. How to Play Each.

People work on the floor of the New York Stock Exchange on July 08. (Michael M. Santiago/Getty Images)

Although 2025 is only about half over, the start of the year might seem like a lifetime ago, given the twists and turns of the past six-and-a-half months.

In fact, while the market is broadly higher, with the Nasdaq Composite hitting a record on Monday and the S&P 500 not far behind, that belies the rally’s roller-coaster ride. Investors have endured three markets in late 2024 and so far in 2025, argues Sevens Report President Tom Essay, each lasting about three months.

The first, which began with the postelection euphoria and ran through January, saw the S&P 500 return 5.4% as investors cheered what they hoped would be an era of deregulation and growth-friendly policies for businesses after the Republican sweep in November. Small-caps and cyclical sectors like consumer discretionary and financials shone.

That narrative fell apart in February, March, and April. Tariffs that were much higher than expected, along with seemingly capricious policymaking from the White House, led to a nearly 8% decline in the S&P 500 as investors worried that a recession was just around the corner. Previous winners–cyclical sectors and tech, from earlier in 2024–fell. Defensive areas like utilities and staples were suddenly back in vogue.

All that changed again in May. Since then, the S&P 500 has returned nearly 12% as the market is hopeful that more favorable trade deals will be struck and that the productivity gains from artificial intelligence will spur long-term growth in profits. Companies related to the AI-trade have benefited, partly because the potential for those gains gives investors a sense of being insulated from the uncertainty the Trump administration’s policies have created.

The point to recognize is that while the current pattern may hold, the market could revert to one of its previous stages, to the advantage of different sectors, Essaye wrote. “The key determining factor will be macroeconomic clarity and economic growth,” he said.

If major trade deals are finally reached and economic data continues to point toward growth, the “Trumponomics” trade that dominated at the start of the year could take the reins. However, if the so-called TACO trade is wrong, and it turn out that Trump Doesn’t Always Chicken Out, tariffs could stay high. That would lead to lower growth and likely would reawaken fear of a recession.

And if conditions remain uncertain, investors will likely continue to focus on what they think will grow regardless, namely everything related to AI. It would amount to a continuation of the current mood on Wall Street.

“Whichever way materializes; we now have a general playbook for each scenario,” Essay said. Guessing what comes next is impossible, but it is possible to get ready.

Write to Teresa Rivas at teresa.rivas@barrons.com