If you read just one economic and market commentary, we hope it is this one. Each January, we see many articles covering the “year in review” and “outlook for the new year”. And yes, we are sharing our thoughts on this timeline, too, with a bit more commentary and less statistics. In under ten minutes, you should have a good picture of the major forces that impact your investments.
Investors ended 2024 on a very positive note.
Looking back on 2024, we see a year marked with political uncertainty, geopolitical woes, and concerns over Federal Reserve policy,. Yet, despite these factors, markets posted above average annual returns last year. The S&P 500 returned nearly 25%[1] to investors after an even higher return in 2023 of approximately 26%. Putting this into perspective, 2023 and 2024 both had returns more than double the 10% average returns seen from the S&P500 since 1957. The last year this index posted close to the average return was 2016 – annual returns of the S&P500 have, with the exception of 2018 and 2022, been quite positive.
S&P500 Historical Returns by Year
Why, despite global uncertainties, did positive market performance prevail? While there are a myriad of reasons, the solid market returns of 2024 can be attributed to individual companies beating analyst expectations, resulting in an increase in the present value of future earnings. This is in part due to expectations about AI, with companies like Nvidia’s valuations surging in recent years. But that’s only part of the story. Retail companies such as Tractor Supply have outperformed the S&P500 over the past 5 years due to expanding sales growth. This goes to show the story of the market is never just driven by one trendy topic such as AI. Stocks become more valuable when investors are optimistic about a company’s future.
Uncertainty can cause investors to worry, and company valuations to decline, but ultimately, these uncertainties become priced into the market. For example, rate cut expectations have been a common cause for fluctuations in company valuations over recent years. As rate cuts get priced in, company valuations increase as the future cost of borrowing declines, when these rate cut expectations decrease, valuations decline as well. The end of 2024 was marked with some decreasing market valuations, partially as a result of “gains taking” — investors selling positions that had increased, and rebalancing their portfolios — and partially due to the changing rate cut expectations coming from the Federal Reserve.
While presidential elections can also cause market volatility, this is generally a more short-lived event. Volatility can occur due to the uncertainty of “who will be President, and what can companies expect from the administration”, but once there is certainty in election outcomes, companies can begin to position themselves for this. Currently the biggest uncertainty associated with the new administration is the quantity and pace of tariffs, and the effect they will have on inflation. The slower and smaller these tariffs are, the more capacity companies will have to position themselves for them.
International markets also appreciated in 2024. U.S. equities were not the only sources of positive stock performance. International developed market indices excluding the U.S. did not perform as well as domestic indices; the Morningstar Developed Markets ex-U.S. still ended the year on a positive note, up approximately 5% in 2024. This is in part due to increased energy costs, U.S. dollar appreciation, and geopolitical uncertainties. Overall, other developed economies had positive performance but not at the pace of the U.S. economy in 2024. Emerging markets had a similar story, outperforming developed markets excluding the U.S., but not performing as strong as the U.S. stock market.
Overall, the story of 2024 can be summarized as a focus on innovation, particularly in AI, with uncertainties around interest rates, presidential elections, and geopolitics. Since we never know which part of the global economy will perform best, a diversified allocation representing the world provides a solid foundation for equity investors.
2025 Outlook
Every January, analysts make bold predictions about “what will the market perform this year”. These turn out to be wrong over half the time, making it a fun exercise to watch, but not one from which to take direction. While we may know many macroeconomic themes going into a year, we have no idea if a major pandemic will break out, or if a large-scale conflict will ignite inflation globally. At EVOadvisers, we do not make 1-year market forecasts, but we will discuss themes for 2025 by analyzing several outlooks on the market.
2025 will likely be marked by changes in trade, tariffs, regulation, and differences in monetary policy by nations, which in turn may cause differences in GDP, inflation and unemployment. This will have effects on currency valuations which will affect equity valuations around the world. Looking at the U.S., tariffs pose the real risk of reigniting inflation, which would trigger the Fed to keep interest rates higher for longer. If U.S. interest rates stay higher than those from nations with competing currencies, the dollar could appreciate, which would positively impact U.S. equities and negatively impact international equities.
JP Morgan’s forecast sees the possibility for continued divergence in monetary policy from the U.S. and Eurozone. Vanguard’s outlook expects the GDP growth in the U.S. to be higher than Europe, with unemployed remaining low in the U.S., with Europe seeing approximately 7% unemployment. Inflation in the U.S. is not expected to reach the fed’s 2% target by the end of the year, and interest rates are generally predicted to remain higher into 2026. Europe could see lower inflation and lower interest rates than the U.S., but it is important to note that the neutral rate is predicted to be lower in Europe and in the USA (Vanguard).
While equity valuations remain higher than historical averages in the U.S. when considering price to equity ratios, differences in the U.S. economy and sector breakdowns may continue to see equities appreciate despite European equities appearing to be priced comparatively better. Differences in the compositions of both markets will likely continue to cause dispersions in market returns.
China will continue play a major role for emerging markets. What role it will play depends on who you ask: Vanguard anticipates China’s GDP to grow by a 4.5%, while JP Morgan predicts a slowdown. The changing valuation of Chinese equities in either direction will have an impact on the emerging market indices as a whole.
While the Fed will continue to keep rates high, the U.S. economy has remained resilient in spite of higher borrowing costs. 2025 will have much of the same themes that have been persistent over recent years. Inflation, monetary policy, AI, and geopolitics will continue to have major roles in shaping the economy and in turn the market.
It is important to keep in mind your personal financial plan, and not focus too closely on any specific year – even the good ones. Long-term financial success involves discipline and patience from investors. Long-term investing means experiencing both periods of market appreciation and decline, and making sure your portfolio reflects a risk profile that suits your needs. Speak with your Certified Financial Planner® to ensure your financial plan and investment portfolio are best suited to your personal needs.
Jack O’Brien CIMA® is a Certified Investment Management Analyst educated at Chicago Booth School of Business and Virginia Tech. EVOadvisers is a fee-only financial advisor based in the Scott’s Addition area of Richmond, Virginia. EVOadvisers also has an office in Irvington, Virginia to better serve clients in the Northern Neck of Virginia. If you have any questions about financial planning and would like to talk with one of our Certified Financial Planner professionals, check us out at www.evoadvisers.com or call (804)794-1981.