
Wealth Management Insights for Q4 2024
We continuously evaluate real-time economic data and short- and long-term forecasts to build customized strategies that grow your money.Year-end Review 2024
The S&P 500 gained 25% in 2024, the second consecutive year of 20%-plus gains for the market. Back-to-back years with gains above 20% gains are unusual, with the most recent prior occurrence in the 1990s. AI was a dominant theme in 2024 as companies in technology and AI infrastructure were among the year’s best performers. Broader equity markets were also supported by solid corporate earnings, easing inflation, and the Fed’s pivot from rate hikes to rate cuts. We saw strong performance across our portfolios again this year, with the equity allocation driving the bulk of gains in individual accounts.
At Nixon Peabody Trust Company, we continuously evaluate economic data and market forecasts to stay on top of fundamental changes in the investment environment. This evaluation drives our top-down view and is a key building block when it comes to building customized strategies that grow your assets. While the flood of financial information can often feel overwhelming, you can be confident that we’ve designed an asset allocation strategy to help you achieve your financial goals.
Market Review
Within equities, S&P 500 returns were primarily driven by the Magnificent Seven, which represented more than half of the index’s returns for the year. The outperformance of these seven stocks was supported by the fundamentals, as these companies exhibit higher earnings growth and profit margins than the rest of the market. We did see some broadening in the third quarter with more stocks outperforming expectations, including non-US markets and small company stocks, but that momentum reversed in the fourth quarter amidst concerns about tariffs and rising long-term interest rates.
Analyzing this performance by sectors, we see that Communications, Technology, and Financials were 2024’s top performers, with Consumer Discretionary also doing well. Materials, Healthcare, and Real Estate were the worst-performing sectors.
Within fixed income, it was a volatile year. Despite three Fed rate cuts in 2024, longer-term bond yields rose (putting downward pressure on bond prices) and the yield curve steepened. We believe this steepening was driven by (1) optimism about economic growth, (2) worries about inflation potentially being stickier than we thought, and (3) concerns about the potential impact of fiscal deficits. Bonds still notched gains overall, particularly among shorter-term bonds, with the Bloomberg 1-5 Year Gov/Credit Index up 3.8%.
Q4 | YTD | |
Equity | ||
MSCI All Country World Index | -0.9% | 18.0% |
S&P 500 Index | 2.4% | 25.0% |
NASDAQ Composite Index | 6.4% | 29.6% |
Russell 2000 Index | 0.3% | 11.5% |
MSCI World ex-US Index | -7.4% | 5.3% |
MSCI Emerging Markets Index | -7.9% | 8.0% |
Fixed Income | ||
Bloomberg Aggregate Index | -3.1% | 1.3% |
Bloomberg 1–5 Year Gov/Credit | -0.7% | 3.8% |
Bloomberg Municipals | -1.2% | 1.1% |
Bloomberg 1–3-Month T-Bill | 1.2% | 5.3% |
Corporate Earnings
While we wait on fourth-quarter and full-year 2024 results to be reported over the next several weeks, S&P 500 earnings growth for 2024 is projected to exceed the 10-year average growth rate of 8%. The robust earnings growth for the overall market masked a wide dispersion between winners and losers, as we alluded to briefly above. The Magnificent Seven were responsible for most of the earnings growth for the year, with earnings growth of the “other 493” expected to be far below the 10-year average growth rate. With equity valuations starting 2025 at high levels, investors will count on earnings and profit margin growth rather than Price to Earnings multiple expansion to drive a continued rally in stocks.
AI
Many of the year’s biggest stock market winners benefited from optimism about the disruptive potential of AI across industries. Capital spending by “hyperscalers”—which build out large-scale data centers that provide cloud computing—fueled a rapid rise in AI-related spending in 2024. Investors remain optimistic about the potential for AI but would be well served to acknowledge the risks in the space today as well. Through that risk lens, we are closely monitoring corporate spending levels as well as the adoption rate of AI technology by consumers and businesses. With regard to corporate spending levels, capital expenditures as a share of revenues have been rising for hyperscalers. Without substantial monetization of the technology in the future, profit margins could suffer. For users of AI, we will continue to evaluate how this technology is being deployed and the impact of their investments on sales and profit margins. Because AI is an important theme for several of the largest 10 stocks that comprise nearly 39% of the S&P 500, the durability of the AI theme will be an important driver of equity market performance in 2025.
Inflation
Inflation rates have come down substantially from post-pandemic highs, but remain above the Fed’s 2% target. While most forecasters expect inflation to reach the 2% target in late 2025 or 2026, it may be challenging to keep inflation below that target for an extended period. This view is guided both by historical observation and current conditions. From a historical perspective, inflation rates have generally trended either up or down for an extended period. While these trends tend to be longer term, there is volatility in the short term as the market tries to anticipate how new information will impact that long-term trend. With that historical backdrop, the risk for the Fed is having false confidence that inflation has been brought completely under control, which is why Fed Chair Jerome Powell has been reluctant to declare “mission accomplished” in the fight against inflation. Looking forward, several factors point to a more unstable environment for inflation, such as more frequent severe weather and geopolitical events that impact supply chains, and a less globalized world. Policy impacts, as discussed below, could also drive inflation higher. Given the more volatile outlook for inflation, investors should expect 2% to be the floor rather than the ceiling for inflation during the next decade.
Policy
Market expectations for Fed rate cuts have reset dramatically in recent weeks. This shift comes as investors expect the Fed to slow the pace of policy easing given above-target inflation and a still strong labor market. This slower pace of easing is our expectation for 2025 unless there are major changes in economic momentum or the labor market that could force the Fed to adjust quickly.
Many other central banks face different challenges, as global growth is weak outside of the US. The eurozone’s economy is flirting with a recession. Consequently, the European Central Bank (ECB) is likely to continue cutting rates despite above-target inflation. Facing slow growth and the likelihood of high tariffs to be imposed by the incoming Trump administration, China’s pivot to expansionary monetary and fiscal policies should accelerate this year.
One area that is difficult to forecast, but is likely to have a meaningful impact on markets, involves the recent US elections. In the short term, the market is looking for clarity on tariffs, immigration policy, and the potential extension or expansion of the Tax Cuts and Jobs Act. Although most economists consider tariffs to be a one-time increase in prices rather than an ongoing increase in inflation, higher prices can create major changes in consumer and business spending decisions. Changes in immigration policy may also influence inflation. A significant reduction in immigration could reduce the number of available workers, returning the job market to an environment in which there are more openings than candidates, potentially creating a return of the wage inflation that occurred in 2022.
Consumer Spending
Retail sales data and consumer outlook surveys show continued strength in consumer spending. Consumer spending has been supported by low levels of unemployment as well as strong household balance sheets, which have been boosted by accumulated savings from COVID, homeowners’ equity, low mortgage rates, and stock market gains. Hiring has slowed to some degree, especially in certain industries, but this trend hasn’t led to anything more systemic. In our view, this labor market resilience has been driven by strong corporate profit margins and improving productivity, which make it less likely that companies will engage in significant layoffs. The consumer spending outlook is not universally positive, however, as lower-income workers, renters, and those with consumer debt struggle under the burden of rising rents, higher interest rates, and increased costs for everyday goods.
Portfolio Positioning
We anticipate equities to reach new highs in 2025 but expect a more volatile path than we saw in 2024. Because investor sentiment is very positive, and equity valuations are at the higher end of the historical range, the road to new highs may include a market correction along the way. Based on the current outlook for economic growth, inflation, and policy, however, a correction would likely represent a buying opportunity rather than a signal to sell.
It is important to be disciplined about examining the prospects for stocks that have delivered significant gains over recent years. It is easy to allow the desire to avoid paying capital gains taxes to override investment judgment, but it is also critical to evaluate whether recent winners will sustain success, and to consider taking gains if the stock is unlikely to repeat prior success. This also creates room for new high-conviction ideas that may be the next winners.
The US may continue to experience economic “exceptionalism”—outperforming much of the rest of the world—but economic performance often does not correlate with stock market performance. Some of the best-performing stocks in 2024 were non-US companies; some of the countries with weak economies, including Germany, boasted strong stock market performance. Selectivity was an important factor in investment success in 2024. Given the volatility we expect in 2025, selectivity is likely to be even more important.
We have positioned portfolios to benefit from a continuation and broadening of the stock market rally, while including conservative bond holdings to diversify portfolios in the event of a weakening of the investment environment. Continued economic growth, sticky inflation, and budget deficits create a risky combination for long-term bonds, so we are maintaining a bond portfolio that emphasizes short-term bonds. Given the expectation for inflation to be a more persistent challenge over the next decade, we expect to invest in assets that cushion the blow of inflation, including real assets such as real estate, natural resources, and infrastructure.
We will be watching earnings announcements as well as economic and policy developments to determine any further positioning changes.
If you have questions or comments about your personal portfolio or any of the trends and strategies we’ve outlined here, please reach out to us or any member of your Nixon Peabody Trust Company team. We’re always happy to hear from you.
Key Contacts
Daniel Kern
Chief Investment Officer
+1 617.345.1044
dkern@nixonpeabody.com
Matthew Martino, CFA
Senior Director of Portfolio Strategy
+1 617.345.1122
mmartino@nixonpeabody.com