2024 | Year End Review
2024 Fourth Quarter Market Commentary
The S&P 500 followed up last year’s strong performance (total return of 26.3% in 2023) with an equally strong gain of 25% in 2024. This marked a rare feat, as not only was it the first back-to-back yearly gains of over 20% for the S&P this century, it was also the 5th-best two-year return for the index in the past 50 years.
While the market posted 57 all-time highs last year, under the surface, the themes that defined 2023 continued. Growth outperformed Value, Large Cap outperformed Mid and Small Cap, and U.S. stocks outperformed International. 3 of the top 4 sectors once again included Communication Services, Technology, and Consumer Discretionary, as Mega Cap tech names were buoyed by excitement around Artificial Intelligence (AI). The Magnificent 7 (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla) accounted for 57% of the S&P 500’s gain, after driving 65% of the returns in 2023. Concentration in the S&P continued to grow, as the top 10 names now account for almost 40% of the index.
Bond returns were much more muted, with the Bloomberg Aggregate Bond Index up 1.3%. Despite the Federal Reserve cutting short-term rates by 1% in 2024, 10-year Treasury yields rose 0.7%, ending the year at 4.58%. Much of that rise occurred in the fourth quarter, driven by higher expectations for growth and inflation, resulting from the incoming administration’s proposed policies.
Looking ahead, there are reasons for optimism as well as causes for concern.
Optimism: The U.S. economy is on solid footing, with consumers continuing to spend and household wealth at record highs, buoyed by rising investment portfolios and home prices. U.S. exceptionalism is real, with our tech sector being the envy of the world. Unemployment is at very low levels, inflation has been approaching the Fed’s 2% target, and GDP growth above 2% has been aided by strong productivity gains. Analysts currently expect double-digit earnings growth for S&P 500 stocks both this year (14.8%) and next year (13.6%).
Concerns: Equity markets are pricy compared to historical averages (the S&P 500 has a forward price-to-earnings ratio of 21.5x vs. its 30-year average of 16.9x) and index concentration is at record highs. It may take some time for inflation to hit the Fed’s 2% target, keeping interest rates higher for longer. The incoming administration’s policies around immigration, deregulation, trade, and taxes could all have impacts on the deficit, growth and inflation, which will in turn impact how the Federal Reserve carries out monetary policy.
High valuations do not necessarily mean the market is due for a correction. While the strength in the markets over the past two years has caused some analysts to lower their long-term expected returns for equities, continued economic growth and strong earnings can provide support for equities going forward.
Unlike the largest companies of the internet bubble of the late 90’s, today’s market leaders are solid companies with healthy earnings, stable free cash flow, and strong balance sheets. While markets are concentrated, it is important to note that the largest names in the index have also accounted for majority of the earnings growth, with the Magnificent 7 stocks growing earnings by 30% for the first three quarters of 2024 versus 4% for the rest of the index. The earnings gap between the market’s leaders and the rest of the market is expected to narrow in 2025.
Two major themes to watch for in 2025 and beyond are the return on investment for the AI hyperscalers (ROI for AI) and the continued adoption and transformation of Artificial Intelligence (companies using AI to improve productivity and profits). Capital spending from the major AI hyperscalers (cloud computing and data center providers) is expected to grow from $126 billion in 2023 to $234 billion in 2025.
With Trump’s fiscal policy on the mind of many investors, there are three many areas to look for when the incoming administration takes office on January 20th: tariffs, immigration, and regulation.
Trump’s proposed tariffs would increase the average tariffs rate from 2.4% of the value of imported goods to 17.7%, its highest level since 1934. As tariffs on imports would likely be met by retaliatory tariffs from our global trade partners, prices would go up and growth could slow. But if Trump uses strong talk around tariffs as a negotiating tactic, as his did in his first administration, the actual number of tariffs applied and their impact on growth and inflation could prove to be minimal.
Trump is pro-business and may scrap any proposals that could prove harmful to economic growth and inflation. Business leaders are eagerly anticipating a deregulatory regime, which could boost M&A activity and benefit financials, energy stocks, and Mid and Small Cap companies. The Tax Cut and Jobs Act of 2017 will likely be extended, but a narrow majority in the House means any deficit hawks could squash additional tax cuts, including corporate rates and taxes on social security, tips, and overtime.
Bond investors will be examining the budgetary impact of potential policies and the Department of Government Efficiency’s proposals to eliminate government waste. As we’ve stated many times before, while the current level of debt is not unsustainable, the path that we’re on is. As fiscal policy is implemented and its potential effects on growth and inflation become clearer, the Fed will likely adjust their policy as needed.
For now, there is reason to be cautiously optimistic, as continued economic and corporate earnings growth is the base case. Policy proposals could cause volatility in the near-term, but as investors it is prudent to tune out the noise, focus on the long-term, and remain disciplined and diversified.
We wish everyone a safe, happy, and healthy New Year! As always, feel free to contact us with questions.
As always, feel free to contact us with questions.
Jonathan F. Kolle, CFA®
President, Chief Investment Officer
Daniel A. Morris, M.S.
Co-Chief Investment Officer
Timothy J. DeAngelo, CFA®
Portfolio Manager
Shawn R. Keane, CFP®
Vice-President
Cindy de Sainte Maresville, CFP®
Certified Financial Planner
Rusty Giles
Director of Marketing
The foregoing content reflects the opinions of Smithbridge Asset Management and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.
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