The U.S. economy and the stock market proved stronger than many had anticipated in 2024. The S&P 500 Index notched 57 new all-time highs on the way to a 25% gain for the year – the second year in a row with a gain north of 20%.
The robust gains in U.S. stocks were driven by a healthy U.S. economy, moderating inflation, and rate cuts from the Federal Reserve. Of course, enthusiasm around artificial intelligence (AI) played a meaningful role, as companies associated with the theme, namely Nvidia and Broadcom, were big contributors to this year’s stellar returns. Within the U.S. stock market, Large Cap Growth stocks (Russell 1000 Growth) once again led the charge ending the year positive 33%, outperforming Larger-Cap Value Stocks (Russell 1000 Value) and Smaller-Cap Stocks (Russell 2000) which ended the year up 14.4% and 11.5% respectively.
Overseas, returns were not nearly as strong. Calendar-year returns for most foreign markets were dragged down by fourth-quarter losses following Trump’s victory, which sparked fears of tariffs and a stronger dollar leading to an economic slowdown. Developed international stocks (MSCI EAFE) posted a modest 3.8% gain. Emerging markets stocks (MSCI EM Index) had a volatile year, finishing the year up 7.5%. Much of that volatility can be attributed to the Chinese stock market (MSCI China Index) which had a strong year (up 19.4%) but was volatile, with significant swings in investor sentiment.
Within the bond markets, returns for the year were mixed across fixed-income segments. The benchmark 10-year Treasury yield experienced significant volatility amid concerns around inflation, interest rates, and the impact of potential tariffs under the Trump administration. After starting the year with a yield of 3.88%, the 10-year Treasury ended the year higher at 4.58%. Against this backdrop, the interest-rate sensitive Bloomberg U.S. Aggregate Bond Index was only slightly positive at 1.3%. Conversely, short-term and credit-sensitive sectors of the bond market—both areas we emphasized in our portfolios—performed well during the year. The Bloomberg Short-Term Treasury Index rose 5.3%, and high-yield bonds (ICE BofA Merrill Lynch High Yield Index) were up 8.2% for the year.
Looking ahead, our base case is that the U.S economy will continue to grow, albeit slower, with a low probability of recession. This should be a supportive backdrop for both bonds and stocks, although we expect the pace of gains to slow. Given stretched valuations for large-cap growth stocks, we continue to think it’s likely that the market gains will broaden to include small and mid-caps and non-tech sectors of the market.
As of year-end, we target a full strategic weighting to equity investments in alignment with our allocation frameworks, while remaining diversified across geographies, including the U.S., developed international, and emerging markets. Within our global equity allocation, we also remain neutral relative to our growth and value tilts. In fixed-income we continue to be significantly underweight within our allocation framework to core bond investments and interest rate risk relative to a traditional bond benchmark, while emphasizing exposure to flexible, shorter-duration and credit-oriented fixed-income investment allocations, which we think will generate better returns relative to their risk. As always, we are weighing a range of shorter-term risk scenarios against each asset’s medium- and longer-term return potential and portfolio diversification benefits assuming different macro environments (inflation/disinflation, growth/stagnation).
While our economic outlook is generally positive, there are plenty of risks. For starters, current valuation levels—particularly for large-cap growth stocks—suggest that there is less room for upside, and there is more downside risk if expectations are not met. A related consideration is the high level of concentration in the S&P’s top-weighted stocks, which could magnify volatility if any of these companies disappoint.
Outside of stretched valuations and market concentration, there are the usual suspects that could cause market volatility, including inflation, monetary policy, and uncertainty surrounding Trump’s fiscal and global trade policy. Investors should be prepared to weather occasional storms in 2025.
Looking at fixed income, the U.S. bond market is stuck between the Fed’s plans to cut interest rates (to some degree) and the risk of higher inflation and increasing federal deficits. As was the case in 2024, we think 2025 will be another bumpy ride for bonds. While we have focused on shorter-term, high-yielding bonds over those with more interest-rate risk, that could start to change if volatility creates compelling opportunities. In any event, higher current yields will result in better bond returns over the long run.
As we enter 2025 there are promising signs of growth and resilience in the economy, and we are also acutely aware of the potential risks that could undercut market stability. The U.S. economy will likely downshift into a slower gear. We do not believe this slower growth, in and of itself, will cause a recession, but it does leave the economy more vulnerable to shocks, including from significant policy changes from the new administration. Furthermore, the past two years of strong returns leaves valuations elevated. Our focus will continue to be on identifying opportunities to improve long-term returns while being vigilant of the risks we are taking. By staying disciplined and opportunistic, we aim to navigate the complexities of the market and position our investments for long-term success. As always, we appreciate your trust and wish you and yours a wonderful new year.
The full commentary is available here: Year-End 2024 Investment Commentary