As 2024 comes to a close, it’s clear that this year was full of surprises. Equities outperformed expectations, while fixed income struggled to meet forecasts. The S&P 500 surged by 23%, driven largely by the “Magnificent Seven,” which, as of this writing in early January, account for 33% of the index. Meanwhile, fixed income markets faced headwinds, ending the year with a modest 1% gain. As we look ahead to 2025, we remain cautiously optimistic, acknowledging the potential for a market correction amidst a broader bull market.
Equity Markets Shine in 2024
Equities delivered robust returns across the board, with the S&P 500 leading the charge, up 23% for the year. The Dow Jones Industrial Average gained 13%, while Mid-Caps and Small Caps rose by 12% and 6%, respectively. International markets posted more modest returns, with Developed International equities up 4% and Emerging Market equities rising 7%.
A significant contributor to the S&P 500’s performance was the “Magnificent Seven”—a group of seven high-performing tech and growth stocks. These companies accounted for 53.1% of the index’s return this year, underscoring the increasing concentration risk within the S&P 500. As these seven stocks now make up a third of the index, diversification within equity portfolios becomes even more critical.
Earnings Surpass Expectations
Corporate earnings were a bright spot in 2024, with overall earnings growth of 9.4%, a marked improvement from the 1.4% growth in 2023. This strong performance helped drive equity markets higher and reinforced the resilience of U.S. businesses in the face of economic uncertainty.
Fixed Income Falls Short
While equities thrived, fixed income markets underwhelmed. Bonds finished the year up only 1%, as the Federal Reserve’s anticipated rate cuts in 2025 diminished amid a better-than-expected economy and strong labor market. The fourth quarter saw a selloff in bonds, driven by reduced expectations for near-term rate cuts. However, looking ahead to 2025, we’re optimistic about fixed income. With rate hikes likely behind us and the potential for cuts later in the year, bonds could see stronger performance, particularly in the second half of the year.
Inflation and the Labor Market
Inflation continued its downward trajectory in 2024, falling from a peak of 9.1% in June 2022 to approximately 3% by year-end. The labor market remained robust, with unemployment at a healthy 4.1%. For 2025, we anticipate inflation to stabilize between 3% and 3.5%, further supporting economic growth.
Outlook for 2025: Optimism with Caution
We enter 2025 with a positive outlook for equities, albeit with an expectation of increased volatility. Historically, markets experience a correction roughly once a year, and with no correction since October 2022, one may be overdue. However, we believe the bull market remains intact, and equities are likely to outperform fixed income and cash in the coming year.
On the political front, renewed concerns about tariffs under the new administration have sparked debate. It’s worth noting that during the prior administration’s first term, tariffs did not lead to a recession or significant inflation issues. Instead, trade deals were renegotiated, and markets reached new highs. We suspect similar strategies may be employed again, with a focus on negotiating leverage rather than economic disruption.
A Bull Market at All-Time Highs
Investors often hesitate to buy when markets reach all-time highs, fearing a pullback. However, history shows that buying at market highs has yielded better one-, three-, and five-year returns compared to investing on average days. With this in mind, we encourage investors to stay the course and remain focused on long-term goals.
Closing Thoughts
2024 reinforced the importance of maintaining a diversified portfolio and staying invested despite market uncertainties. As we head into 2025, the combination of a resilient economy, moderating inflation, and potential tailwinds for fixed income positions investors well for continued success. While volatility may increase, the overarching trend remains positive, and we look forward to helping our clients navigate the year ahead.