Bullish Horizons: 3 Top Investing Ideas for a Prosperous 2025

In a year marked by market resilience and renewed optimism, the investing landscape is brimming with opportunity. After a robust two-year stretch marked by back-to-back double-digit gains in 2023 and 2024—the best performance in a quarter century—stocks are once again showing signs of strength. Despite a bumpy start to 2025, recent data suggest that the bull market is back on track. The positive momentum in the economy, bolstered by last year’s interest-rate cuts and a rebound in hiring expectations to the top 25% of their historical range, is setting the stage for what could be a remarkable year ahead.

As a Fidelity strategist and investing expert, my approach centers on analyzing market history to identify patterns and probabilities that help challenge investor biases. This method provides an objective backdrop for understanding the current environment and pinpointing where the most bullish signals lie. Today, I want to share three investing ideas that I believe are poised to capitalize on this optimistic backdrop. Specifically, I see compelling opportunities in the consumer discretionary, financial, and software sectors. Let’s explore each of these areas in detail.

1. Consumer Discretionary: A Boost in Consumer Spending

Positive Shifts in Consumer Behavior

One of the most promising indicators for consumer spending comes from the National Federation of Independent Business (NFIB) surveys. These surveys ask small business owners about their plans to adjust prices and wages over the next 12 months. In recent years, many small businesses have focused predominantly on raising prices to cope with inflationary pressures. However, a recent shift in sentiment shows that small businesses are now planning to raise wages and prices roughly equally. This change is not just a number—it signals a potential boost in consumer buying power. When businesses invest in their workforce by increasing wages, consumers tend to have more disposable income, which can translate into higher spending.

Why Consumer Discretionary Stocks Look Attractive

The consumer discretionary sector has been on an impressive earnings-growth trajectory, outpacing the broader market since July 2023. Moreover, valuation metrics for consumer discretionary stocks have recently moved into historically attractive territory. For instance, the average valuation of stocks in this sector, when measured by free cash flow, has dipped into the cheapest 25% of its historical range. Free cash flow represents the cash that a company generates after accounting for capital expenditures, and low valuation levels based on this metric have historically been a decisive bullish signal.

Historically, periods when consumer discretionary stocks trade at these attractive levels have been followed by strong market outperformance over the subsequent 12 months. This makes the current environment particularly enticing for investors looking to ride the wave of improved consumer sentiment and earnings growth. The convergence of better wage dynamics and attractive valuations could support a sustained uplift in consumer discretionary stocks.

The Bullish Case for Consumer Spending

The underlying rationale for investing in consumer discretionary is robust. The evolving business sentiment, combined with improving employment conditions and a favorable economic backdrop, suggests that consumers may soon be spending more. In turn, companies in the consumer discretionary sector—ranging from retail to leisure and entertainment—stand to benefit significantly. Investors looking for growth opportunities in an economy that is expected to experience renewed consumer confidence should consider increasing their exposure to this sector.

2. Financials: Extending the Winning Streak

Attractive Valuation Metrics

The financial sector presents another compelling case for bullish investment. Even after a recent period of strong outperformance, the sector continues to offer attractive valuation opportunities. Two key valuation metrics to consider are the forward and trailing price-to-earnings (PE) ratios. These ratios, which compare a company’s current stock price to its earnings (either estimated for the next 12 months or earned over the past 12 months), are currently in the bottom 15% of their historical ranges for the financial sector. Such low valuation levels suggest that stocks in this space are trading at a discount relative to their historical norms.

Historically, when financial stocks have been priced at these levels, the sector has consistently outperformed the broader market over the ensuing year. This relationship underscores the potential for continued outperformance as the market re-prices these stocks.

Contrarian Indicators and Valuation Spreads

In addition to traditional valuation metrics, I also pay close attention to contrarian indicators such as valuation spreads. Valuation spreads measure the difference between the most expensive and least expensive stocks within a sector and can serve as a proxy for investor sentiment. Wider spreads typically imply greater investor fear, which paradoxically has often preceded periods of strong performance. Recently, valuation spreads among financials have widened to levels that approach those seen during recessionary periods. This indicates that the market may have already priced in a substantial amount of downside risk, potentially setting the stage for a surprise upside.

Earnings Growth and Market Dynamics

Another tailwind for the financial sector is the resurgence in earnings growth. Financial institutions have seen their earnings rebound, aided by both recent declines in interest rates and narrowing credit spreads. These factors not only enhance profitability but also provide an encouraging backdrop for further earnings expansion. For investors, the combination of attractive valuations, contrarian sentiment signals, and improving earnings growth creates a persuasive case for considering increased exposure to financial stocks.

3. Software Companies: Underappreciated Growth Amidst AI Hype

A Sector with Hidden Value

While the broader market has been abuzz with discussions around artificial intelligence (AI), it’s important not to overlook the broader software sector. Over the latter half of last year, software companies underperformed relative to the overall market. Despite delivering strong earnings and generating impressive free cash flow, their stock prices lagged behind. This disconnect between fundamentals and market sentiment has pushed the average relative valuation of software companies into the bottom half of its historical range—specifically when measured by forward PE ratios.

Low relative valuations are a tried-and-true indicator for potential upside. Historical data shows that after periods characterized by low relative valuations, the software sector has outperformed the broad market approximately 70% of the time over the following 12 months.

Earnings Growth as a Catalyst

The story becomes even more compelling when you consider earnings growth. Over the 12-month period through November, software companies have grown their earnings at a faster rate than the S&P 500® index. This divergence between earnings growth and market performance suggests that the market may be undervaluing these companies. When you combine strong earnings momentum with low valuations, you arrive at what I call a “sweet spot” for software stocks.

Past performance reinforces this thesis. Historically, software stocks in such environments have gone on to outperform the market by an average of 10 percentage points over the next 12 months. For investors with an appetite for growth and a long-term perspective, software companies offer an attractive opportunity that may not be fully appreciated by the market at present.

Balancing the AI Narrative

It’s true that AI has captured much of the market’s attention in recent times. However, the focus on AI does not diminish the underlying value and growth potential of established software companies. Many of these companies are the backbone of the AI revolution, providing the platforms and infrastructure that enable AI innovations. In this context, investing in the software sector not only offers the chance to benefit from underappreciated growth but also positions investors to participate in the broader technological transformation that is reshaping our world.

Navigating the Bullish Signals in Today’s Market

A Confluence of Positive Factors

What makes this moment particularly compelling is the convergence of several bullish factors. The back-to-back double-digit gains in 2023 and 2024 have set a strong foundation, and the renewed bullish sentiment in early 2025—supported by improved hiring expectations and accommodative monetary policy—has reinvigorated investor confidence. My research, which is grounded in market history and objective analysis, indicates that the current economic environment is ripe for further stock market gains.

Challenging Conventional Wisdom

One of the critical aspects of my approach is challenging conventional wisdom and investor biases. Often, investors are swayed by short-term market fluctuations or overly focused on one sector at the expense of others. By taking a step back and looking at historical patterns, it becomes clear that opportunities exist across multiple sectors. Whether it’s the consumer discretionary sector benefiting from improved wage dynamics, the financial sector offering deep value amid widespread pessimism, or the software industry presenting an undervalued growth story, the market today offers a diversified set of opportunities for the discerning investor.

Building a Balanced Portfolio

Incorporating these three investment ideas into your portfolio can help create a well-rounded strategy that not only taps into current market momentum but also positions you for long-term success. Each of these sectors—consumer discretionary, financials, and software—has its own unique set of drivers and tailwinds. By diversifying across these areas, you can mitigate risk while capturing the upside potential that each sector offers.

• Consumer Discretionary: Focus on companies that are likely to benefit from rising consumer spending as improved wage dynamics boost buying power.
• Financials: Look for financial institutions trading at attractive valuations with strong earnings growth and contrarian valuation spreads.
• Software: Identify software companies with robust earnings growth and low relative valuations, which may be poised to outperform in the coming year.

Staying Informed and Agile

The market is always evolving, and staying informed is key. As an investor, it’s crucial to continuously monitor economic indicators, earnings reports, and valuation metrics to ensure that your investment thesis remains valid. The bullish signals we’re seeing today—driven by both macroeconomic trends and sector-specific fundamentals—are compelling, but flexibility and agility in your investment approach remain paramount.

Conclusion

In summary, the current market environment is laden with bullish signals that suggest significant opportunities across multiple sectors. With stocks having delivered their strongest two-year performance in decades, combined with a renewed economic outlook and positive hiring trends, investors have a unique opportunity to position their portfolios for continued growth.

The three investing ideas I’ve highlighted—consumer discretionary, financials, and software—each offer distinct advantages. Consumer discretionary stocks are set to benefit from improved consumer spending driven by better wage dynamics. The financial sector presents an attractive valuation story, with contrarian signals and rising earnings growth hinting at further upside. Meanwhile, software companies, despite the market’s focus on AI, are showing underappreciated growth potential backed by strong fundamentals and low relative valuations.

For investors looking to navigate these bullish signals, a diversified approach that balances exposure across these sectors can help mitigate risks and capture the potential upside. As we move deeper into 2025, now is the time to reexamine your portfolio, consider these opportunities, and stay agile in response to evolving market dynamics.

By grounding our investment decisions in historical patterns and objective analysis, we can challenge biases and uncover opportunities that may not be immediately apparent. Whether you’re a seasoned investor or just starting your journey, incorporating these three ideas into your investment strategy could be the key to capitalizing on one of the most exciting market environments we’ve seen in recent years.

As always, while the market presents compelling opportunities, it’s important to align any investment decisions with your overall financial goals and risk tolerance. Consult with your financial advisor to ensure that your portfolio is well-positioned to take advantage of these bullish signals while remaining resilient in the face of potential market volatility.

Embrace this dynamic moment in the market, stay informed, and invest wisely. The signals are bullish, and the opportunities are ripe—it’s time to consider these three investment ideas and see where they might take your portfolio in the coming months and years.