December & 2024 Market Recap – Looking Ahead to 2025

December & 2024 – Market Recap

“2024 Review and Looking Ahead to 2025”

Ryan Potts – Portfolio Manager

As 2024 has ended and we head into 2025, let’s take a moment to reflect on what shaped the last twelve months. We will look at key factors such as Inflation, Interest Rates, and gross domestic product (GDP) growth and how they played out in 2024. We will revisit the expectations for 2024, highlighting how these predictions played out, and discussing the overall market performance. We’d also like to present our thesis for next year and the years ahead as we shape our investment portfolios, which are conducive to helping our clients continue to reach their long-term goals.

2024 Economic Projections:

2024 was full of surprises, but many economic outcomes were aligned with expectations set a year ago. Many projections anticipated a cooling labor market, with unemployment returning to more of a “historical average” after some of the lowest levels seen in history. Inflation decelerating toward the Federal Reserve's (FED) 2% target was also wildly anticipated. However, many worried that inflation would be stickier than it has shown. These two things played out, with unemployment gradually accelerating past 4.3% in late summer. At the same time, inflation continued to cool off throughout the year, reaching an annualized rate of 2.7% by December, well off the recent highs of 9.1% in the summer of 2022.

However, not all expectations were met. For example, monetary easing was expected throughout the year, with initial forecasts pricing in six rate cuts. We only received two cuts in 2024, three if you count the initial 50 bps cut in September as two cuts. Even though the FED cut the overnight rate, we saw an increase in the 10-year yield by about 16%. So, yes, the FED cut rates, but yields have increased since then. Going into 2024, many investors would have expected such a rise in yields to have adversely affected the markets. However, what we saw play out was quite the opposite; the S&P 500 gained a staggering 25% for 2024. This was after a phenomenal year in 2023, with an above-average gain of 26%... the last two years have been nothing short of extraordinary for investors if you ask me.

Source: Source: Bloomberg, FactSet, Federal Reserve, J.P. Morgan Asset Management.

Economic growth in 2024 was projected to slow, but more importantly, it was expected to remain positive, avoiding a recession. What we experienced was even better than this. Gross Domestic Product (GDP) growth for 2024 exceeded expectations, symbolizing a strong underlying economy. Most of this growth came on behalf of the US Consumer, surprising many with strong consumption. This reaffirms a well-known market truism: "Don’t bet against the US consumer.”

Source: BEA, FactSet, J.P. Morgan Asset Management. Values may not sum to 100% due to rounding. Trend growth is measured as the average annual growth rate from business cycle peak 1Q01 to business cycle peak 4Q19.

In short, many economic projections for the year were accurate, and just as many were wrong. It is hard to predict what will come out of market performance solely based on economic backdrops. Nonetheless, in 2024, the underlying fundamentals remained strong, and outcomes even stronger.

Equity Market Outcomes:

Equity markets delivered strong performances in 2024, with the S&P 500 gaining over 25% and the Nasdaq Composite surging around 30%, reflecting robust growth in large-cap and technology sectors.

While large-cap stocks significantly outperformed, gaining more than 24%, small-caps saw a more modest increase of around 11%. Growth stocks outperformed their value counterparts, posting gains of over 32% compared to less than 14% for value stocks. This was driven by investor preference for innovation-focused and high-growth companies focused on AI.

On the global front, domestic equities significantly outpaced international markets. U.S. stocks, as measured by the Russell 3000 Index, a broader domestic benchmark, returned slightly over 23%, while global equities, represented by the ACWI ex-US, lagged with a 5% gain. The disparity highlights the continued strength of the U.S. economy and corporate earnings relative to global peers. Overall, 2024 was a remarkable year for equities, with domestic and growth-focused sectors leading the charge.

Fixed-Income Market Outcomes:

The fixed-income market in 2024 faced a challenging yet dynamic environment. The 10-year Treasury yield experienced a modest increase, beginning the year at 4.02% and ending at 4.36%, reflecting cautious optimism about economic stability amid a backdrop of moderating inflation. The yield curve, which remained inverted for much of the year, showed signs of reinverting, signaling an end to the rising interest rate environment we have seen in the last two years.

Credit spreads tightened throughout the year, indicating improved confidence in corporate creditworthiness. High-yield bonds significantly outperformed investment-grade counterparts, with U.S. High Yield returning 8.19%, compared to the U.S. Bloomberg Aggregate Bond Index, which posted a modest gain of 1.25%. This divergence underscores investors' search for yield and willingness to embrace credit risk in a low-return environment. Overall, the bond market has balanced stability and opportunity and is shaped by evolving monetary policy and resilient economic conditions.

Current Financial Backdrop Heading into 2025

The current financial landscape is defined by moderate economic growth, supported by a resilient labor market and robust consumer spending. Monetary policy has shifted to a more accommodative stance, fostering stable interest rates and contributing to low and declining inflation. Corporate profits show underlying growth, although their impact may be tempered by elevated starting valuations. As we look ahead, these conditions provide a foundation for cautious optimism, setting the stage for forecasts that balance potential opportunities with emerging challenges in the year to come.

Expectations for 2025

As we leave 2024 behind, it’s time to frame the opportunities and challenges that 2025 may bring. While this outlook is not a precise forecast for the year ahead, it highlights key factors to watch and provides rough guidelines for what investors might expect in the short term. Our focus remains on making sound, long-term investment decisions amid a complex and evolving financial landscape. Underlying economic growth, bolstered by a resilient consumer base and continued monetary policy easing, sets the stage for cautious optimism.

Equity Market Predictions

The S&P 500 enters 2025 with a demanding valuation multiple. Still, earnings growth in the low teens for 2025 and 2026 suggests potential for modest overall market growth, but we expect lower returns than the prior two years. Broader market performance is expected as diverse sectors experience accelerating earnings growth, which could drive solid returns and multiple expansions. However, weaker-than-anticipated earnings growth could introduce market volatility, emphasizing the importance of staying nimble. The equity portfolio remains centered on domestic markets, complemented by selective, high-quality exposures in international and emerging markets.

Bond Market Predictions

The bond market is expected to navigate a reinversion of the yield curve as short-term rates decline and long-duration yields stabilize above recent norms. Credit spreads will likely continue normalizing, offering an improved environment for fixed-income investments. Investors can anticipate a modest gain in bond markets, reflecting steady returns driven by stabilizing yields and a supportive monetary backdrop. Overall, bonds present a balanced opportunity for diversification and moderate income growth in the year ahead.

Excited about the Opportunity Ahead

As we reflect on the past year and look ahead to the opportunities and challenges that lie before us, we want to take a moment to express our heartfelt gratitude. Thank you for placing your trust in us as your financial advisory team and for allowing us to work alongside you in achieving your financial goals. Your confidence in our guidance and partnership inspires us to continue striving for excellence every day. We are honored to be a part of your journey and look forward to navigating the years ahead together with dedication, integrity, and a shared commitment to your success.

- Your Correct Capital Team