Q4 2024 Market Update

In 2024, U.S. stocks had another strong year, with the S&P 500 gaining over 20%, marking two consecutive years of similar returns. The “Magnificent 7” (Microsoft, Apple, Alphabet, Meta, Amazon, Nvidia, and Tesla) drove more than half of these gains, along with large-cap growth overall. However, the rally slowed in the volatile fourth quarter despite two rate cuts of 0.25%, and November’s election which provided a brief tailwind to equities.  Market sentiment was especially tempered by Fed Chair Jerome Powell signaling a cautious approach to further rate reductions in 2025. Expectations for 2025 rate cuts dropped from four to two after stronger-than-expected economic data. December CPI remained sticky at 2.9%, while nonfarm payrolls surged with 256,000 jobs, well above the expected 153,000. Still, U.S. stocks still rose 2.6% in Q4, though market gains remained heavily concentrated in a smaller number of stocks.

International markets struggled in comparison. EAFE which is a measure of developed markets not including the US and Canada fell 8.11%, and the MSCI EM which measures developing markets comprising 1,400 stocks from 24 different countries dropped 8.01%, largely due to a strong U.S. dollar and outperformance of U.S. mega-caps. Further uncertainties in global regions remain due to the potential tariffs under the new administration which could lead to a stronger dollar reducing the value of foreign earnings for U.S. companies and makes exports more expensive. [1]

In the bond market, rising rates caused bond prices to fall, pulling the Bloomberg Aggregate Index into negative territory for Q4 with a -3.06% return. High-yield bonds fared better, returning 0.17%, as credit was rewarded by economic strength. Longer-term bonds suffered the most due to their higher sensitivity to interest rate changes, with the Bloomberg Long Treasury Index (maturity greater than ten years) returning -8.62%.

Looking ahead to 2025, uncertainty surrounds the potential impact of new policies, particularly on tariffs, tax cuts, immigration, and deregulation. The S&P 500 remains expensive and concentrated with a price-to-earnings ratio of 28x.  Despite this, the U.S. economy shows resilience with strong labor markets, slowing overall inflation, and positive earnings growth forecasts. Perhaps, it is even more prudent now to remain well balanced and well diversified given the uncertainty of the upcoming year.

[1] The Barrons Daily, Jan 17, 2025.