The stock market has just endured a challenging week, and 2025 may bring even more difficultiesFollowing the Federal Reserve’s hawkish stance on interest rate projections for the upcoming year, the market is heading toward its worst week since March 2023. However, the internal data from the markets suggests that damage has already been done before the Federal Reserve’s meeting on December 18th, signaling that tough times lie ahead.

By Thursday of last week, the number of declining stocks in the S&P 500 had exceeded the number of advancing stocks for 14 consecutive daysThis advancing/declining data helps gauge internal participation in market trends, and the recent weakness signals that despite the S&P 500 being only 4% off its all-time highs, the broader index’s internals have already suffered.

This damage becomes clearer when looking at the equal-weighted version of the S&P 500, which has fallen 7% from its historical peak

According to Ed Clissold, Chief U.SStrategist at Ned Davis Research (NDR), this 14-day losing streak of advancing/declining stocks is the worst since October 15, 1978. Clissold explains that a trend of losses for ten days or more—where advancing stocks trail behind declining ones—is often a signal of weak returns in the future.

Since 1972, this situation has only occurred six times, but the data shows that the forward returns for the S&P 500 tend to be weak after such periodsFollowing these ten-day downtrends, the index’s average six-month forward return has been a meager 0.1%, compared to a typical 4.5% return during all other periods.

“While conclusions drawn from just six cases are not enough to form a full strategy, market tops always have starting points, and many tops begin with divergences in market breadth, or when the broader index rises with participation from only a few stocks,” Clissold noted.

As the stock market environment remains complex and volatile, investors are closely monitoring its future direction

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Perhaps the real key to understanding the market’s trajectory lies in its ability to turn around during the holiday trading window—often considered the most promising and optimistic period for investorsIf the market cannot recover during this time, it would send a significant signal, according to Clissold.

“If there’s no holiday rally, it’s not only concerning from a seasonal perspective, but it could also deepen the breadth divergence,” Clissold warned. 

In his deeper analysis of market dynamics, Clissold highlights the critical role that investor sentiment plays in shaping market behaviorSince September, the market has been buoyed by a surge in optimism, creating an environment of intense and aggressive investment activityAccording to NDR’s internal sentiment survey, this optimistic sentiment is the longest sustained period of bullishness since 1995. 

“Several sentiment measures have reached levels that may not be sustainable,” Clissold stated, cautioning that any reversal in sentiment could signal weak market returns in the future.

As time progresses, the market situation becomes clearer

The prolonged period of stock market weakness is increasingly apparent, particularly with the structural issues within the market, which have contributed to a lack of momentumIn this context, Clissold believes that investors will face a much more challenging road in 2025 than in the relatively easier market conditions of 2024.

“If the market fails to correct the recent breadth divergence in the coming weeks, it will suggest that our concerns about a more difficult 2025 may indeed become a reality,” Clissold warned.

Clissold’s analysis reflects a broader skepticism among investors who are starting to question the sustainability of the market’s recent highsThe stock market, which has relied heavily on a narrow group of stocks for its gains, could face an uphill battle as economic uncertainties grow.

This sense of fragility is compounded by the broader macroeconomic environment

The Federal Reserve’s commitment to maintaining high interest rates for longer than expected could dampen economic growth and increase borrowing costs for businesses and consumers alikeHigh interest rates have already started to cool down the housing market and the broader economy, leading some analysts to predict a potential slowdown in the coming months.

The combination of weakening market breadth, a hawkish Federal Reserve, and concerns over investor sentiment could create the perfect storm for a challenging 2025. Investors who have been enjoying the recent bull run might find that the coming year presents a much different landscape—one filled with uncertainty and increased volatilityIf these trends continue, 2025 could be marked by a return to more typical market conditions, where gains are harder to come by and risks loom larger.

Looking ahead, investors must navigate these complexities with caution

For now, the market appears to be at a crossroads, with the potential for either a recovery or a deeper downturnHow the market behaves over the next few weeks—especially through the end-of-year holiday trading window—will likely set the tone for the year aheadIf the market fails to stage a recovery, it could signal that the optimism that has driven the market to new highs is fading, and a more challenging phase could be on the horizon.

Ultimately, Clissold’s analysis underscores the critical importance of market breadth and investor sentiment in shaping future market performanceWhile the broader market indices may not be reflecting the underlying weakness, the internals of the market suggest that a deeper correction may be on the wayWith the potential for a difficult year ahead, investors must be prepared for a more turbulent and uncertain market environment in 2025.