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The stock market has experienced a challenging week, and it might also be facing a difficult year in 2025.

 

The market is on track for its worst week since March 2023 after the Federal Reserve projected a cautious outlook regarding interest rate reductions in 2025. However, examining the market's internal dynamics, it is apparent that damage was inflicted well before the Fed's meeting on Wednesday—and this is a historic indicator of challenging times ahead.

 

The number of declining stocks in the S&P 500 surpassed advancing stocks for 14 consecutive days as of Thursday.

 

The advancing/declining data helps to assess underlying participation in market movements, and the recent weakness indicates that even though the S&P 500 is only down 4% from its record high, damage exists beneath the surface of the benchmark index.

 

This is demonstrated by the equal-weighted S&P 500 index being down 7% from its record high.

 

According to Ed Clissold, chief US strategist at NDR, the S&P 500's 14-day losing streak in its advance-decline line is the worst since October 15, 1978.

 

Clissold noted that 10-day losing streaks or longer in advancing stocks relative to declining stocks can signal ominous prospects for future stock market returns.

 

Although this situation has only been triggered six times since 1972, it demonstrates lackluster forward returns for the S&P 500. The index has shown an average six-month forward return of 0.1% following these 10-day breadth losing streaks, compared to the typical 4.5% average gain observed during all periods.

 

"Studies with only six cases hardly constitute a strategy. But market tops have to originate somewhere, and many commence with breadth divergences, or widely followed averages posting gains with minimal stock participation," Clissold said.

 

Perhaps more indicative for the stock market is whether it can stage a recovery as it approaches one of the most bullish seasonal periods of the year: the Santa Claus trading window.

 

If it cannot, that would be telling, as per Clissold.

 

"A failure to see a Santa Claus Rally would be worrisome not only from a seasonal standpoint, but it would permit breadth divergences to intensify," the strategist mentioned.

 

Additionally concerning to Clissold is investor sentiment, which has exhibited signs of extreme optimism since September. According to the research firm's internal crowd sentiment measure, it is in the seventh-longest stretch in the zone of excessive optimism, based on data since 1995.

 

"Several surveys have reached potentially unsustainable levels," Clissold advised, cautioning that any sentiment reversal could serve as a warning signal for future market returns.

 

Ultimately, sustained stock market weakness, particularly in the internals, would lead Clissold to suggest that 2025 might not be as easy as 2024 for investors.

 

"If the stock market cannot address recent breadth divergences in the coming weeks, it would indicate our concerns about a more challenging 2025 could become a reality," the strategist concluded.

Investors may be underestimating the threat to the bull rally posed by wild moves in the foreign exchange market.

 

KKR wrote in its 2025 outlook this week that currency swings will become the market's "Achilles' heel" next year.

 

"Our bottom line is that this is not the time to take a lot of excess exposure risk on FX, as it may prove to be the dominant story of 2025," it said.

 

The firm said investors should brace for trade wars and widening fiscal imbalances to turbocharge foreign exchange volatility beyond recent norms.

 

Tariffs will likely upend interest rate coordination worldwide, while economic friction causes further disruptions. Monetary policy helps dictate currency levels, and big changes can spur instability.

 

Meanwhile, high levels of government debt can slash demand for a country's currency, triggering devaluations.

 

KKR urges investors to consider how the market behaved between 1994 and 2000. After interest rate hikes first rattled markets in 1994, the stock market went on to rally, similar to what has happened since 2022, KKR said.

 

"However, things became unsettled in 1998, as a combination of currency unwinds and excess leverage led to a short and sharp market correction that investors were underestimating," the outlook noted.

 

Investors can already see this taking place in some markets.

 

Debt and stock markets in Brazil have been shaken this week amid a deep plunge in the country's real. The currency has become the worst performer against the dollar, hitting a record low on Wednesday.

 

Brazilians have been dumping the real since late November after proposed austerity measures failed to satisfy investors concerned over the country's widening fiscal deficit.

 

Still, KKR is largely optimistic about 2025. The firm expects the S&P to reach 6,850 by year-end, before racing toward 7,500 in 2026.

 

"To be sure, we expect plenty of volatility, consolidations, and drawdowns along the way to our 2025-26 price targets," KKR wrote, suggesting that investors couple mega-cap tech exposure with cyclicals, as well as small and mid-cap stocks.

The challenged Chinese autonomous trucking company TuSimple has now rebranded itself as CreateAI, shifting its focus towards video games and animation, the announcement was made on Thursday.

 

This announcement follows GM's closure of its Cruise robotaxi division this month, marking a phase where the once-thriving self-driving startup industry is starting to eliminate laggards. TuSimple, operating in both U.S. and China markets, faced its own problems, including vehicle safety concerns, a $189 million settlement from a securities fraud lawsuit, and its removal from Nasdaq in February.

 

Over two years after CEO Cheng Lu rejoined the company in this role after being ousted, he now forecasts the business might reach a break-even point by 2026.

 

This optimism is tied to a video game based on popular martial arts novels by Jin Yong, planned for an initial release in that year, according to Cheng. He foresees generating "several hundred million" in revenue by 2027 when the complete version is launched.

 

Prior to its delisting, TuSimple reported a loss of $500,000 during the first three quarters of 2023 and invested $164.4 million in research and development during that time frame.

 

Company co-founder Mo Chen has a "long-standing connection" with the Jin Yong family and initiated work back in 2021 to produce an animated feature based on the novels, as Cheng explained.

 

The company touts its artificial intelligence expertise in developing autonomous driving software as providing a foundation for the development of generative AI, which is the advanced technology powering OpenAI’s ChatGPT, able to create human-like responses to user inputs.

 

In conjunction with the CreateAI rebranding, the company has launched its first significant AI model named Ruyi, an open-source visual work model available on the Hugging Face platform.

 

"Our shareholders clearly recognize the value in this transformation and are eager to progress in this new direction," Cheng expressed. "Both our management team and Board of Directors have received tremendous support from our shareholders." The company is slated to hold its annual shareholder meeting on Friday. Cheng stated the company intends to expand its workforce to around 500 next year, up from the current 300.

 

Co-founder Xiaodi Hou, claiming to be the largest individual shareholder at 29.7%, has openly questioned the shift towards gaming and animation. Hou announced his intention to withhold or oppose support at the shareholders meeting and advocated for the liquidation of the company. He has since launched his own autonomous trucking firm in Houston called Bot Auto, which secured $20 million in funding in September.

 

While still operating under the TuSimple brand, the company announced in August a collaboration with Shanghai Three Body Animation to produce the first animated feature film and video game based on the science fiction novel series "The Three-Body Problem."

 

The company mentioned at the time that it was inaugurating a new business sector dedicated to the creation of generative AI applications for video games and animation.

 

CreateAI anticipates reducing top-tier, known as triple A, game production costs by 70% within the next five to six years, according to Cheng. He did not disclose whether the company is in discussions with gaming giant Tencent.

 

When questioned about the implications of U.S. restrictions, Cheng asserted there were no difficulties, stating the company utilizes a combination of Chinese and non-Chinese cloud computing providers.

 

The U.S., under the Biden administration, has intensified restrictions on Chinese businesses’ access to advanced semiconductors necessary for powering generative AI.

 

Gold prices edged up on Thursday, erasing earlier gains after U.S. data reinforced market expectations that the Federal Reserve will take a cautious approach to policy easing in the year ahead.

 

Spot gold was up 0.2% at $2,592.39 per ounce and U.S. gold futures fell 1.7% to $2,607.50.

 

Data earlier showed the U.S. economy growing faster than expected in the third quarter, while jobless claims also fell more than anticipated.

 

"With these GDP prints and the jobless claims, it's showing that the data is fairly firm," said Bart Melek, head of commodity strategies at TD Securities, adding that a solid economy and inflationary risks, including tariffs and spending cuts, reaffirm the Fed has little reason to be aggressive, which historically has not been good for non-yielding gold.

 

Gold slipped more than 2% to a one-month low earlier in the session after Fed officials dialed back projections for future easing given stubborn inflation.

 

The drop attracted investors to buy, sending prices as much as 1.5% higher earlier in the session.

 

"The short-term dip in gold presented a good buy-in opportunity for long-term stackers. You have the looming debt problem, the potential government shutdown, and we're already seeing the posture of the new administration in terms of trying to cut the expenses and minimize the deficits," said Alex Ebkarian, chief operating officer at Allegiance Gold.

 

U.S. President-elect Donald Trump's pre-inauguration push to sway Congress threatens to complicate efforts to avoid a government shutdown, potentially disrupting services such as air travel and law enforcement ahead of the holidays.

 

Gold is considered a safe investment option during economic and geopolitical turmoil and tends to thrive in a low-interest-rate environment.

 

Investors await Friday's release of core PCE data, the Fed's preferred inflation measure, for further clues on the economic outlook.

 

Spot silver fell 1.4% to $28.95 per ounce, platinum added 0.1% at $920.55 and palladium rose 0.5% to $907.68.