2024 Market Recap and 2025 Outlook
By Osborn Williams & Donohoe on January 27, 2025
2024: Building on Momentum
2024 was highlighted by lower inflation, strong earnings growth, a robust consumer, and declining interest rates. Market participation broadened relative to 2023; the technology sector contributed 43% to the S&P 500’s total return in 2024, compared to 55% in 2023. When looking at the Magnificent 7 stocks, this cohort made up 53% of the S&P 500’s total return in 2024, compared to 62% in 2023.
Long-term Treasury yields increased relative to short-term yields as the Federal Reserve began cutting interest rates with higher growth expectations in a second Trump presidency. This trend will likely continue as the Fed remains focused on price stability and maximum employment. A balanced labor market and healthy consumer should support further growth in the economy.
The 2024 Recession that Never Materialized
Entering 2024, expectations for the market and economy were low. In their 2024 outlook, J.P. Morgan projected a 25% chance for a U.S. recession by the first half of 2024, and 45% chance by the second half of 2024. Goldman Sachs stated that the risk of a recession in 2024 was 30%. Both institutions had little faith in the U.S. stock market; J.P. Morgan believed the S&P 500 would end the year at 4,200, with Goldman Sachs projecting 4,700. No recession materialized, and the S&P 500 closed the year just shy of 6,000.1
Economic and market resilience dominated 2024. Inflation trended towards the Federal Reserve’s 2% goal, the labor market remained balanced, and companies grew earnings above estimates. The unemployment rate is at its long-term average and wage growth is above inflation, supporting consumer activity. Market performance and economic activity beat almost all expectations that were held entering 2024.
Source: FactSet. As of December 31, 2024 2
2024 Performance
- 2024 marked another strong year for markets; the S&P 500 rose 24% following 2023’s gain of 25%. The past two years marked the first instance since 1997-1998 of consecutive years with returns exceeding 20%.
- The top-performing sectors included communication services, financials, and consumer discretionary. All three of these sectors gained over 25% in the year. Every sector was in the green, with materials being the laggard, down -1.6%.
- The equal-weight S&P 500 gained 11% in 2024, lagging the market-cap weighted S&P 500 by 13 percentage points. But in the second half of 2024, the equal-weight index performed in line with the market-cap weighted index pointing to a broadening, both gaining ~7.5%.
- Fixed income securities provided a positive total return, with high-yield bonds gaining nearly 10%.
- If you managed to stay invested, shutting off the emotions of an election year, you likely generated solid returns in 2024.
Source: FactSet. As of December 31, 2024 3
- The S&P 500 ended 2024 higher once again, gaining 24%.
- Gold and silver had strong years, gaining 27% and 22%, respectively.
- The 10-year Treasury yield opened 2024 at 3.88% and ended the year at 4.57%. The yield was as high as 4.74% in April, and as low as 3.58% in September.
- U.S. Crude closed 2024 at $71 per barrel, near the bottom end of its trading range over the last two years. U.S. crude oil price returns were relatively flat in 2024.
Federal Reserve Expectations: Where is the Neutral Rate?
2024
Heading into 2024, the market anticipated rate cuts, but the timing and size were unknown. Markets estimated six 25 basis point cuts, totaling 150 basis points worth of cuts. This estimate ended the year being slightly aggressive, as the Fed cut a total of 100 bps across the final three meetings of the year.
At the December FOMC meeting, one member voted against a 25 bp cut, and many non-voting members also voiced concerns against a cut. Going forward, many are questioning how low the neutral rate truly is: the interest rate at which monetary policy is considered neither stimulative nor restrictive to economic growth. The Fed believes this rate is 3.0%, but the market says it’s higher.
2025
In 2025, expectations are for two 25 bp rate cuts. This would bring the Fed Funds Rate to 3.75-4.00%, which is still above the Fed’s terminal rate of 3.0%.
The economy is growing above trend, with 4% wage growth, inflation near the Fed’s goal, and an average unemployment rate relative to history. Further rate cuts into an expanding economy could reignite inflation and put the Fed in a predicament.
The Fed is likely to cut in 2025, but possibly not to the extent believed as of today. The Fed lowered its policy rate less than expected in 2024, so fewer than two cuts in 2025 would not be out of the ordinary.
Inflation or the Labor Market: Where is the Federal Reserve’s Attention?
During 2024, the Consumer Price Index (CPI) averaged 2.96% y/y, and the Producer Price Index (PPI) averaged 2.19% y/y. The Fed’s preferred inflation gauge, the Personal Consumption Expenditure Index (PCE), averaged 2.51% y/y. All three inflation readings are close to where they began 2024 at, but they still fall short of the Fed’s 2% long-term target.
In December, Fed Chair Jerome Powell noted that the U.S. economy is in “a really good place”. But Powell also stated that he would like to see further progress on inflation as they think about further cuts. The Fed cut in three consecutive meetings to end 2024, with the Fed Funds Rate now at 4.25-4.50%, down from 5.25-5.50% at the start of 2024.
The labor market has cooled but remains balanced. Monthly job gains averaged 190K in 2024, with an average unemployment rate of 4% – both better than the 10-year averages (160K and 4.70%, respectively). 4
A soft landing for the economy is in view. The Fed will continue to be cautious with rate cuts, remain attentive to data, and react quickly to any unexpected weakening in the economy. The U.S. economy should remain robust in 2025.
Source: FactSet. As of December 31, 2024 5
A Normalizing Yield Curve
Interest rate uncertainty spiked in 2022. Short-term yields rose at the beginning of the year, moving ahead of the Fed. They began declining in late 2023, once again front-running the Fed. For the past two years, bond yields have done much of the work for the Fed.
But now, the bond market seems to be disjointed from the Fed. Bond yields moved lower in late 2023, anticipating cuts that never came. Once cuts came in late 2024, bond yields rose – indicating that the Fed might be incorrect to ease into an expanding economy.
The yield curve turned negative in mid-2022 as the Fed raised front-end rates with the long-term economic environment unknown. This changed in 2024 as rate cuts began and the economic environment became clearer. An upward-sloping yield curve sends the message of less economic uncertainty to investors.
With two cuts as the current consensus in 2025, we expect a continuation of normalizing yields as short-term rates decline further.
2025: A Pivotal Point in Markets
Economic data was resilient throughout 2024. With the U.S. presidential election behind us, markets have less uncertainty and can focus on fundamentals going forward.
Valuations remain elevated with the S&P 500 trading at a 24.9x price-to-earnings ratio, above the 10-year average of 18.8x.
Heading into 2025, expectations for continued strong performance remain high. The 2025 earnings per share estimate for the S&P 500 of $275.24 (15% y/y growth) is the highest since FactSet began tracking in 1996. We believe high single digit earnings growth is achievable for the index in 2025, near the 10-year average of 8%.
Manufacturing Reshoring and International Tariffs in 2025
In late 2023, Boston Consulting Group reported that more than 90% of North American companies relocated production and sourcing over the past five years. From 2018-2022, U.S. imported goods from China declined by 10% and rose 18% from Mexico, 44% from India, and 65% from the 10 countries in the Association of Southeast Asian Nations.6
President-elect Donald Trump has said that he plans to implement and increase tariffs on goods imported to the U.S. from around the world. He has mentioned putting a 25% tax on imports from Mexico and Canada, along with increasing tariffs on imports from China by 10%. In addition to tariff policy, the next administration is aggressively seeking better pricing from trade allies and global supply chain efficiencies.7
The Trump Administration: Will Deregulation Lead to an M&A Boom?
Initial public offering (IPO) and merger and acquisition (M&A) activity has been muted ever since 2021. Increased levels of inflation and borrowing costs, election uncertainty, and strict regulation have kept the M&A market quiet.
In 2024, we learned that investment banks have a vast M&A and IPO pipeline but are waiting for the right environment for dealmaking. David Solomon, CEO of Goldman Sachs, noted that M&A volumes are currently 13% below the 10-year averages – an improvement from being down 25% across the first nine months of 2023. Solomon noted that muted M&A activity has been the result of a strict regulatory environment.8
2025 will likely bring lower regulation, improving the M&A and IPO market. Also, clarity surrounding bank regulation and capital requirements will ease concerns and likely improve the overall functionality of the major banks.
What Was Old, Is New Again
The Covid-19 pandemic exacerbated a shift to remote work, online shopping, and extinguished in-person events. The belief was that the economy shifted to a new normal characterized by a virtual world, but it seems that this is not the case.
Shopping malls are packed, concert venues are full, cruise ships are booked, and even relics such as Barnes & Noble are making a resurgence. Consumers are returning to their pre-pandemic behaviors, looking to leave the virtual world for live experiences.
We see these trends continuing into 2025. Mall and amusement park traffic, in-person events, and older hobbies such as tangible books and film photography are becoming popular once again, all supported by a healthy and spending U.S. consumer.
The Return of Pre-Pandemic Activities, Thanks to a Spending U.S. Consumer
J.P. Morgan projected that 35.7 million passengers traveled on cruise ships in 2024, 6% above pre-pandemic levels. Travel and discretionary spending has risen in part due to the spending capacity of Millennial customers growing 49% since 2019.9
Through the first half of 2024, U.S. store openings outpaced closures by 20%. National retail vacancy rates held steady at 4.1%, and the demand for retail space has surged by 54 million square feet over the past year, led by the food and discount retailer industries. Brick-and-mortar stores were thought to be past time but have been supported by a spending, growing consumer base.10
Consumer-exposed companies confirm our belief that the U.S. consumer is alive and well. Wage growth is exceeding inflation, with slowing price increases and a solid labor market. The wealth effect from higher home and stock prices is being realized across the economy in the form of continued spending.
We believe the U.S. consumer will continue spending on discretionary goods and services in 2025, ultimately supporting a continued expansion of the U.S. economy.
Diversifying Portfolio Exposure with Alternative Investments
Compared to institutional investors, individual investors are under-allocated to alternative investments. The average individual investor allocates 3% to alternative investments, whereas endowments allocate 57%. In terms of the investable universe, 87% of companies with $100 million of revenue or more in the U.S. are private; compared to 13% public. Private markets provide investment opportunities in sectors of the economy that are difficult to gain exposure to in public markets, and there are many emerging themes across private markets in 2025. Research has shown that adding alternatives to a diversified portfolio can improve returns while lowering volatility.11
Over the last few years, changes in regulations, technology, and continued product innovation have made alternative investment opportunities more accessible than ever. Taking into account an individual’s risk tolerance and liquidity needs, it is now possible to build a diversified private markets allocation to complement a traditional portfolio with public equities and fixed income.
Themes to Watch in 2025
With easier monetary policy, expansionary fiscal policy, and declining inflation, we are monitoring cyclical themes that may benefit from an economy growing above trend. We believe sector performance in 2025 will be driven by areas of high investment and consumer resiliency. Companies well-positioned to benefit from improved price stability, technological innovation, and an economic expansion are likely to outperform.
Power and Grid Industrials
AI adoption will require a vast amount of energy production. The U.S grid has not been upgraded in 40 years, and new forms of power will likely be needed, such as natural gas and nuclear energy.
Tariffs, reshoring, and power demand are the drivers for this industry. The Trump administration is likely to be tough on foreign goods, bringing industrialization back to the states. The need for more power to support AI advancement is real – the hyperscalers are in a race to sign deals with utility providers to service their data centers. An industrial revolution is taking place in the U.S. given these major developments.
Cybersecurity
In 2024, the average data breach cost $4.9 million in recovery expenses. With more data online today than ever before, protecting and securing data is one of the most important areas of focus for C-suite executives.
Housing
Home buyers are eagerly awaiting lower mortgage rates. Five million millennials are looking to be first-time home buyers, and the U.S. has underproduced home building for 14 years. The result is little supply, with much demand.
The Major Financials
Lower short-end yields, and higher long-end yields, will assist the major banks in net interest income production. Investors have not seen net interest income growth for over two years, and the major banks are well positioned in 2025.
Regulation is the turning point for financials in 2025. A slow IPO market and muted M&A activity are likely to flip this year. More rate cuts this year should provide banks with more spread to gain in terms of borrowing versus lending. A healthy consumer, growing loan demand, and improving deposit base will further support the financials.
The American Consumer
Retail sales remain robust, rising 4% y/y in November. Wage growth is outpacing inflation, and the wealth effect is being felt through a well-performing stock market and record-high home prices.12
We learned in 2024 that American consumers are alive and well but are being selective in their preferences. The top food and retail companies had a strong 2024, while lower-end retail and high-end discretionary items struggled. In 2025, the consumer will remain healthy while also spending in a constructive manner. Discretionary is likely to continue to outperform staples, with the consumer still preferring experiences (services) over material goods.
2023 and 2024 brought investors above-average returns in public equity markets. After being led by technology and communication services for the past two years, we would welcome a broadening of market participation in 2025 as a sign of a healthy trend. Lower interest rates should benefit a wide range of economic sectors, such as the ones mentioned above. Lagging sectors such as health care, real estate, and energy could see a turnaround in 2025. We believe that dividend payers with more reasonable valuations are well positioned to participate in a broadening market.
All of us at Osborn Williams and Donohoe thank you for your continued trust and confidence. We welcome any opportunity to be of assistance to you and your family members.
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1Source: J.P. Morgan. As of December 13, 2023. Goldman Sachs. As of November 21, 2023.
2Source: FactSet (chart). As of December 31, 2024.
3Source: FactSet (chart). As of December 31, 2024.
4Source: Federal Reserve. As of December 18, 2024.
5Source: FactSet (charts). As of December 31, 2024.
6Source: Boston Consulting Group. As of September 21, 2023.
7Source: CNBC. As of November 25, 2024.
8Source: Goldman Sachs. As of October 13, 2024.
9Source: J.P. Morgan. As of June 7, 2024.
10Source: Colliers. As of July 10, 2024.
11Source: Blackstone. As of September 2024.
12Source: J.P. Morgan. As of August 1, 2024.
