2024 Fourth Quarter Review and Outlook
Dear Clients,
2024 was a year of decidedly mixed results. Stocks produced their second year in a row of double-digit returns, led again by the 48% return of the “Magnificent 7” stocks. In contrast, the other 493 stocks in the S&P 500 Index gained 10%, and international equities were up 6.1%. Bonds generated lackluster returns in 2024, with the Bloomberg US Aggregate Bond Index gaining 1.3%.1
Stock markets were pushed higher by broadly positive economic signals. Capital investment by corporations, much of it related to AI, was strong, and corporate profits grew at a brisk 9% clip. Unemployment held near historical lows at around 4%, while GDP expanded at close to 3%. Workers have now seen wage gains for twenty consecutive months.
Having declared victory over inflation, and eager to ensure continued growth by encouraging borrowing and investment, the central bank began easing monetary policy in the fourth quarter, lowering official interbank lending rates by a full 1%.2
But against such a backdrop of strong economic data, the reduction in short-term borrowing costs had relatively little effect on long-term interest rates (including mortgages), which remained stubbornly elevated. During the final months of the year, investors grew increasingly concerned that the unexpectedly strong job market might trigger a new round of rising wages and consumer prices and undermine the Fed’s plans to lower interest rates further in 2025.
The incoming administration’s promises of tariffs and deportations fed additional fears of renewed inflation, helping to push yields higher and erase bond investors’ gains from earlier in the year.
Outlook
We begin 2025 with solid economic momentum. Inflation has dropped from 9.5% to under 3%, almost back to pre-pandemic levels. Gross domestic product grew at a healthy 3.1% in the third quarter of 2024 and is expected to continue expanding at a sustainable pace into 2025. Just-released December employment numbers point to a strong labor market. Wall Street consensus estimates for corporate profit growth in 2025 are running at 14%, with profit margins boosted by revenue expansion and cost controls. The Fed has signaled two more rate cuts this coming year, though whether these materialize will likely depend on cost of living and employment data.3
The most visible threats to an otherwise benign outlook are related to unusually high valuations in large pockets of the stock market and to the potential for policy errors by the administration.
At a current price-to-earnings ratio of 21.5x, the S&P 500 is at the upper end of its historic valuation range. In the past, multiples as elevated as this have eventually been followed by periods of disappointing returns.
Market concentration also bears watching. The Magnificent 7 stocks (Apple, Google, Amazon, Meta, Microsoft, Tesla, and Nvidia) have risen in price to the point where they represent roughly 34% of the S&P 500. This level of concentration hasn’t been seen since the early 1970s. An economic slowdown, disappointing profit growth, or simply a rotation away from AI, could have an outsized impact.
On the policy front, mass deportation of undocumented immigrants would deprive the US economy of badly needed workers, especially in agriculture, construction, and hospitality. Such a loss of capacity could constrain economic growth, while driving labor costs higher.
The tariffs on imports that Trump campaigned on, if fully implemented, would push up prices of everything from electronics to clothing. Tariffs also invite retaliation from our trading partners, potentially slowing the US economy and worsening the trade and budget deficits.
Notwithstanding these risks, our base case is that economic momentum is likely to persist into 2025. Barring the imposition of extreme tariffs, we think inflation is likely to stay low in the months to come, and the job market to remain healthy. Though political drama could spark volatility in financial markets, we expect the Trump administration will be less extreme in its implementation of policy than campaign promises might suggest—if only out of concern that a renewed surge in inflation could lead to mid-term election defeat two years hence.4
While earnings growth of the largest tech companies has slowed from the explosive rate of early 2024, the lackluster earnings of the remaining stocks in the S&P 500 have begun to strengthen, helped by lower short-term interest rates, moderating wage growth, and robust consumer spending. If this trend continues, it could be accompanied by a broadening of the stock market rally to new industry sectors.
We believe that a diversified approach to equities will help mitigate the risk of concentration and high valuations. International stocks look cheap relative to the US, while within the domestic market, value and small cap stocks have lagged for years. We also think bonds offer attractive yields at current prices and that fixed income presents a compelling risk-return profile.
LongView Notes
We are delighted to welcome Martin Rodriguez to our team as Assistant Advisor. Martin grew up in Dexter, NM, working alongside his father at the local dairy in his free time. In his second year of college, he realized that his passion and vocation lay in finance. While attending school remotely, he worked at JP Morgan Chase, Morgan Stanley, and Wells Fargo in Albuquerque, simultaneously passing his securities licenses (Series 7 and 66) and becoming a Notary Public. Martin joined LongView in November.
In 2024, we were pleased to sponsor events supporting the Santa Fe Watershed Association, Santa Fe Pride, and the NM Historic Women Marker program. We also expanded the list of community-based nonprofit organizations with whom we work as investment advisors. This year we plan to stay the course, renewing our accreditation as a Certified B Corp and working to benefit our local and global community. We are more committed than ever to our path of sustainable and socially responsible investment, and we will continue to implement a balanced, long-term approach in managing your portfolio.
Finally, new SEC regulations have come into effect designed to prevent the waves of financial fraud that often target older people. We will be reaching out to our clients over 65 in the coming weeks to discuss measures we can take to keep your accounts safe.
We wish you peace, prosperity and happiness in 2025!
The LongView Team
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[1] https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/
[2] https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/
[3] https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/
[4] https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/