“People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.” – Peter Lynch
Review
The major stock market indices posted positive gains in the fourth quarter, which wrapped up a very good year for the broad market. For the quarter, the S&P 500, Dow Jones Industrial Average (DJIA), and NASDAQ grew by 2.4%, 0.9%, and 6.3%, respectively. Big technology stocks continued to lead the way, which was the main theme throughout the year. The stock market performance far surpassed expectations from early in the year, when many economists were warning of an impending recession, and the Federal Reserve had not yet started lowering interest rates. However, with equity valuations still at reasonable levels, the market was able to shrug off recession worries and continue its upward path despite concerns around the presidential election, conflicts overseas, and uncertainty about the path of inflation and the Federal Reserve’s interest rate policy moving forward.
The S&P 500 wrapped up its best consecutive years since 1997 and 1998, and recorded 57 record closes while the economy exhibited solid growth throughout the year as inflation drifted lower. According to Bespoke Investment Group, “For all years since 1953, which was the first full year of the 5-day trading week in its current form, there have only been six other years in which there were at least 50 trading days with record highs.” The S&P 500 finished the year up 25.0%, with the DJIA and NASDAQ posting advances of 15.0% and 29.6%, respectively.
The best performing sectors during the year were Communication Services, Technology, Financials, and Consumer Discretionary, all of which gained more than 30% in 2024. The laggard sectors for the year were Materials, Health Care, Real Estate, and Energy, all growing less than 10%. Technically, the Materials sector posted a slightly negative return of (0.04%), but the other ten industry sectors showed positive growth for the year. Interestingly, the only two sectors to outperform the S&P 500 over the last 20 years are the consumer discretionary and technology sectors.
As we have noted in previous letters, the S&P 500 is heavily concentrated in a handful of large technology leaders. More specifically, Alphabet, Apple, Amazon, Meta Platforms, Microsoft, Nvidia, and Tesla (the Magnificent Seven as they are referred to by market pundits) comprise approximately 33% of the S&P 500 index. The Magnificent Seven stocks accounted for about 57% of the stock index’s gain in 2024, according to Dow Jones Market Data. And that came after similar strong returns in 2023, when the same group of stocks accounted for 65% of the S&P 500’s gain. While the Magnificent Seven stocks lifted the broader market in 2024, conversely, a downturn in those same names could drag the market lower if their businesses don’t meet or exceed expectations.
The fixed income markets had more headwinds in 2024 than the equity markets. The 10-year US Treasury note yield finished 2024 at 4.58%, up from 3.86% at the end of 2023, and more significantly, up almost a full percentage point from where it stood on the day the Federal Reserve announced its first rate cut in September. As interest rates increase the value of existing bonds declines, thus negatively impacting the total return. The broad Bloomberg US Aggregate bond index was only able to post a 1.25% gain for the year. However, for most short-term government and investment grade corporate bonds, investors were able to squeeze out a 4-5% return for the year.
Outlook
The U.S. economy continues to perform at a high level. Sam Stovall, Chief Investment Strategist at CFRA, forecasts a 2.4% rise in real GDP for 2025, slightly less than the anticipated gain of 2.8% in 2024, on the expectations that higher interest rates will slow economic growth. The labor market is a little softer than in 2023, but the unemployment rate is still low at 4.2%, and wage growth has exceeded the inflation rate in the past year. With continued strong growth, most market prognosticators expect the Federal Reserve to lower interest rates only two times in 2025, however Goldman Sachs expects three rate cuts from the Fed as inflation resumes its downward trajectory.
According to Barron’s, analysts are expecting record earnings from American businesses in 2025. The consensus forecast for 2025 S&P 500 earnings per share is currently $275, which would represent a 13% growth rate from 2024. Earnings growth will likely need to be the driver of higher stock prices this year, as few strategists are forecasting much growth in valuation multiples, which are already extended at a little over 21 times projected earnings. Stocks generally go up when their earnings rise and/or the valuation multiple placed on those earnings expands. If multiples stop expanding, which is likely to occur in 2025, then the earnings growth will need to carry the load. It will be important to follow how earnings expectations track during 2025.
There are always many things that can worry investors about the future prospects for the stock market. Here are a few at the top of the list as we move into the new year:
- Ballooning national debt with politicians from both sides of the aisle spending with reckless abandon.
- Unknown effects of any new potential tariffs on inflation and economic growth.
- Path of inflation towards the Fed’s intended long-term target of 2.0%.
Most market strategists are predicting market returns in the high single digits for 2025. If you listen to most strategists each year, they often predict that the market will increase from 6-10% on any given year. However, over the past 100 years, the stock market has been more likely to gain 10% to 20% in a year than 0% to 10%, according to Deutsche Bank data. Overall, stocks have gained 20% or more in a year 39% of the time. Of course, there are the down years sprinkled in which pull the long-term market averages down. An average year, which analysts are predicting, doesn’t happen very often.
As noted earlier, the S&P 500 just had its two best consecutive years since the late 1990’s, with both years gaining more than 20%. The S&P 500 has gained 20% or more in consecutive years just three times in its history. Thus, with a limited data set it’s difficult to draw much from previous occurrences. According to Bespoke Investment Group, “We’ve seen this set up three times in the index’s history, and one time it was down big the next year (-39% in 1937), once it was relatively flat (+3% in 1956), and the other time it was up big (+31% in 1997).” Those periods in market history were very different – the depression era, post WWII expansion, and the tech boom. We anticipate a positive year, but with more muted returns compared to the last two years.
Assuming 2025 turns out to be another market advancing year, we think it is unlikely to come without some volatility. According to Bespoke Investment Group, since 1928, the S&P 500 has averaged about one 10% correction per year, but there wasn’t a 10% correction in 2024. The last year to not see a 10% correction was 2021. Bespoke further notes, “The S&P 500 remains in a bull market, and for all periods since 1928, the S&P 500 has been in a bull market on nearly 80% of all trading days. On any given trading day throughout the stock market’s history, the odds of the S&P 500 being up on the day are roughly 53%. For all one-year periods, the likelihood of the stock market trading higher increases to 75%, and it goes up to near-90% over all five-year time frames. Bull markets have historically been much more prevalent than bear markets, so if you bet against the market, the odds are stacked against you.”
Sam Stovall, CFRA Chief Investment Strategist, sums up his outlook for 2025 by stating, “Naturally, investors wonder if 2025 will be a “three-peat” or a third consecutive year of double-digit gains. While we think the bull (market) will still be standing by the end of the coming year, we project increased volatility accompanied by a lower-than-average full-year percentage gain.” In keeping with the quote provided at the beginning of our letter by Peter Lynch, former manager of Fidelity Magellan, anticipate the unexpected and invest for the long-term. That continues to be one of the keys to being a successful investor.
Please let us know if you have any questions or if you would like to discuss your financial situation in detail. Thank you for being clients of our firm.
Sincerely,
Marietta Wealth Management, LLC
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