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What’s In Store for the Equity Markets in 2025

In this episode of The SIFMA Podcast, SIFMA’s President and CEO, Kenneth E. Bentsen, Jr., sits down with Katie Kolchin, CFA to discuss the latest U.S. Equity Market Structure Compendium. This report summarizes market activity and themes in 2024, including: the AI boom, market concentration, higher-for-longer rates, earnings growth, and more.

Transcript

Edited for clarity

Ken Bentsen: Hello and thank you for joining us for this episode of the SIFMA podcast. I’m Ken Bentsen, president and CEO of SIFMA and your host. In 2024, the S&P 500 once again delivered a 20-plus percent gain with a rocky start to the year, can momentum recover through the rest of 2025? Both equity and options volumes had very strong years last year. Will 2025 set records again? Today, we’re going to explore what’s in store for equity markets in 2025. And I’ve invited Katie Kolchin, Managing Director and Head of Research at SIFMA and the author of SIFMA Insights to discuss her latest U.S. Equity Market Structure Compendium. This is a comprehensive 100-plus-page report that summarizes market activity and the themes of 2024, including the AI boom, market concentration, higher for longer rates, earnings growth, and more. It also surveys SIFMA’s equity markets and options trading committees, as well as representatives from equity and options exchanges about their expectations for 2025. And with that, let’s get started. Katie, thank you for being with us today.

Katie Kolchin: Thank you, Ken.

Ken Bentsen: So, let’s look back. What did the numbers tell us about the equity markets in 2024?

Katie Kolchin: Once again, the S&P 500 finished last year strong, averaging in the 5,400 level and returning over 23%. By now, we all know the numbers. We have not seen two 20% plus return years for the S&P 500 since the 1990s, and that phenomenon has only occurred four times going back to the 1920s.

Ken Bentsen: So as much as much as theme last year was around market concentration in the so-called mag 7 and more. What did you see in your analysis around this and what you called the true technology?

Katie Kolchin: Indeed, one of the most commonly discussed themes for equity markets in 2024 was market concentration. The Mag-7 alone represented 34% of total S&P 500 market cap last year. We then looked at the adjusted technology sector. So this is the officially classified technology stocks plus the four Mag-7 names that are not labeled as technology but traded as technology plays. We call this the true technology group and this represented 46% of the index last year. Investors had to worry about single stock concentration as well. The market caps for each of the MAG-7 were over 2% of the index. So as this group, or the true technology group as a whole, went, the market went.

Ken Bentsen: So looking to 2025, what did our survey say and what are market participants expecting?

Katie Kolchin: Around two-thirds of our survey respondents expected the S&P 500 to increase somewhat in 2025. Looking at the responses for upside and downside risk to markets, inflation, and rates ranked number one for the upside while geopolitical risks topped the downside list. There were some interesting commonalities in responses for both upside and downside. Inflation and rates appeared in the top three for both, meaning what the Fed does next and we would argue where the 10-year treasury rate moves, which is currently being driven more by fiscal policies than monetary policy, will be crucial to market performance.

President Trump’s policies also appeared in both upside and downside risk to markets. For upside risk, market participants acknowledged that tax policy and deregulation would be beneficial to corporations and therefore stocks. On the downside, tariffs and corresponding trade wars could reignite inflation and therefore pause rate cuts or worse, force the Fed to reverse course and raise rates. If you take a look at the strategist, the equity strategist estimates, the S&P 500 is now expected to end this year in the 6,800 level. This would be a 3% increase from where we ended 2024. This would be below the 8% historical average, but still good given all of the uncertainty we have seen to start this year. We also note That is only March and a year is a long time.

Ken Bentsen: So let’s maybe shift to the VIX and volatility. What did the metrics say about volatility in 2024?

Katie Kolchin: For the most part, excluding some periods of elevated levels, volatility was muted in 2024 at 15.61 on average, which was minus 7.5% to the prior year. This was in line with pre-COVID historical levels.

Ken Bentsen: So the VIX pushed through events to come down for the year in 2024 realigning to historical levels. In the compendium, you performed a what-if scenario analysis. Can you tell us about the results?

Katie Kolchin: Without question, the 2024 VIX spent more days at lower levels, 141 days under a VIX price of 15 to be exact. This compares to 93 days under this level in 2023 and zero days in the prior two years. There were events causing temporary spikes in volatility. So to look at that, we performed a what-if scenario analysis removing these temporary spikes in volatility.

Without these moments, the VIX could have ended 2024 below the 15 level around 14.8 or 14.9. The point is, that brief shocks come and go. Despite short-lived volatility periods, people continued investing last year. Corporate margins were growing and there was still an AI kicker benefiting markets. Markets also calmed after the election results through the end of last year.

Ken Bentsen: So as we look to 2025, did our survey respondents have to say about the VIX looking ahead?

Katie Kolchin: Over half of respondents anticipate a VIX in the high teens over the next 12 months. The next closest response was in the low 20s at 16% of survey responses. So people do expect it to be a bit elevated from where we ended last year. The VIX is currently around 20.

Ken Bentsen: So let’s shift to equity trading. What did the numbers say about equity volumes in 2024?

Katie Kolchin: So equity volumes remained elevated to historical levels at 12.2 billion shares on average in 2024. This set a record for annual ADV and increased over 10% to the prior year. The peak level last year was 23.8 billion shares on December 20th after an FOMC meeting. Going back to 2007, this was the second highest volume day and there have only been seven days historically where volumes topped 20 billion shares.

Ken Bentsen: So a topic that’s increasingly being discussed among the industry with some concern, I might add, is the increased trading in low-price stocks. What are you seeing there?

Katie Kolchin: So we highlighted quite a few themes in the compendium that are discussed frequently, but this one was quite interesting. And it is a topic, as you mentioned, discussed frequently, not just by the industry, but specifically in our equity trading committee. If you look at the average daily volumes, low-price stocks, which are those either less than a dollar or priced between one to $5, represented 28% of total volumes last year. Sub-dollar stocks were 13.5 % of that total.

So listeners may be wondering why this was such a hot topic last year and continuing into this year, I should add. There are several risks and challenges associated with trading low-price stocks, including low liquidity, high volatility, and the potential for market manipulation among others. These risks are shown in the bid-ask spreads. Spreads are an indicator of a stock’s liquidity and volatility measures. More volatile stocks may have wider spreads given increased risk and uncertainty about future price movements. The weighted average spread for sub-dollar stocks was 76 basis points versus seven basis points on average for all stocks. This was 11 times greater than the average, indicating this higher risk.

Ken Bentsen: So, looking ahead to 2025 and thinking about trading volume and the like, what are the expectations from our survey respondents?

Katie Kolchin: Almost half of our survey respondents expected ADV to remain in the 12 to 13 billion shares level in 2025. That said, 26% of respondents believe volumes could increase to over 13 billion shares.

Ken Bentsen: So let’s shift over to options, the options market. What are the metrics tell us about options volumes in 2024?

Katie Kolchin: So 2024 saw a continuation of the growth in options volumes, ending the year at 47.3 million contracts on average, which was a 9% increase year over year. Markets saw 75 days last year where volumes were between 50 to 60 million contracts and 12 days where volumes were over 60 million. Options volumes just continue to grow.

Ken Bentsen: And then, you in particular, we’ve seen a tremendous amount of growth in short-dated options. What are your thoughts and what does the Compendium say about that?

Katie Kolchin: So first, let’s just define the term for our listeners. Short-dated options contracts expire at the end of the current trading day, but are generally listed about a week prior to expiration. Since 2018, total options volumes grew 148%, with this growth driven by short-dated options. If you look over the same time period, short-dated options grew 318% from 6 million contracts to 25 million. On the other side of this, contracts expiring and greater than in one week grew only 66%. So short-dated options volumes represented 55% of total volumes in 2024, which is up from 33 % in 2018.

So people must ask why the growth? Well, short-dated options have become and have been and continue to be an important risk management tool, particularly for hedging against an upcoming event. Traders and investors use index or ETF products to focus on a single day or event-specific risk, such as an FOMC meeting or corporate earnings release date. Additionally, the increase in product offerings contributed to this growth. If you think just about the S&P 500 options contracts, they now have expirations for every day of the week versus only Fridays, historically.

Ken Bentsen: So again, looking ahead to 2025, what do our survey respondents think about the trend line for the options market?

Katie Kolchin: So just squeaking out a majority, 51% of respondents expected to see options ADV in the 45 to 50 million contracts range in 2025. And another 35% of survey respondents expected options volumes to surpass the 50 million level.

Ken Bentsen: So finally, let’s talk about capital formation. We’ve seen ups and we’ve seen downs over the last couple of years in the capital formation space. What are the numbers tell us about 2024 compared to say 2023 where obviously things were off?

Katie Kolchin: So capital markets performed well in 2024, posting solid increases versus the prior year and moving more in line with historical averages. Total equity issuance finished last year at $221 billion, which was a 59% increase versus the prior year. IPO deal value alone was $31 billion last year, which was a 56% increase.

Ken Bentsen: The theme I noticed in the report, and it’s not necessarily a positive trend, is that 2024 marked the third year of declines in a row for listed operating companies, which is interesting because, as you’ll recall, a couple of years before, we saw, for the first time in almost two decades, an uptick in the number of publicly listed companies. What are your thoughts about this?

Katie Kolchin: So you’re correct, Ken. It was back in 2021 when we finally returned to the 6,000 level. In fact, we had over 6,100 listed operating companies at that time. Now the number for 2024 declined to the 5,400 level, which was a 4% decline year over year. This marked the third year of declines in a row, albeit last year’s decline was less than that of the prior year, which could be an indication of the, hopefully an end to this trend. We ended last year 9% below the 6,000 level, which is the threshold that you mentioned we were so happy to return to just a few years ago.

Ken Bentsen: And now we’re two months into 2025, two and a half months into 2025. There are some deals on the books. What does a year look like for IPOs?

Katie Kolchin: For the first two months of 2025, IPO deal value was 6.8 billion, which is plus 27% versus the same time period last year. These two months are already over one fourth of 2024’s full year total. So from a numbers perspective, I would be happy with this result for the first two months of the year. However, it will be interesting to see how we finish this month. Much uncertainty remains around tariff policy and what the impact could be on markets and the economy.

Ken Bentsen: So thank you, Katie, for joining us today and thank all of you all for listening, to read the report as well as its companion the Fixed Income Market Structure Compendium. Please visit www.siffma.org/insights and you can learn more about SIFMA and our work to promote effective and resilient capital markets at www.siffma.org. And we welcome your thoughts and suggestions and you can reach us at [email protected] Thank you again, Katie, for being with us, and thank all of you for listening.

Katie Kolchin: Thank you, Ken.

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Kenneth E. Bentsen, Jr. is President and CEO of SIFMA. From 1995 to 2003, he served as a Member of the United States House of Representatives from Texas. Prior to his service in Congress, Mr. Bentsen was an investment banker specializing in municipal and housing finance. 

Katie Kolchin, CFA is Managing Director, Head of Research for SIFMA and the author of SIFMA Insights.

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