By: Darren W. King | Wealth Management
Equity markets continued pushing through all-time highs in the fourth quarter, as economic growth remained resilient, and the non-contested presidential election fueled a fourth quarter rally. The S&P 500 gained 2.39% in the 4th quarter, and 25.00% for the year. The Technology-heavy NASDAQ was up 29.60% in 2024, while the DOW Jones Industrial Average was up only 14.99%. The Russell 2000 Small Cap Index finished the year up 11.53% over the same period. International developed market equities, as measured by the Morgan Stanley Capital International Europe, Australasia, and Far East Index (MSCI EAFE), closed the year up 4.43% in US dollar terms and up 10.67% in local currency. The MSCI Emerging Markets Share Price Index closed 2024 up 7.97% in US dollar terms.
The fourth quarter witnessed technology and growth shares outperform while interest rate sensitive sectors corrected after the Fed indicated less interest rate cuts in 2025, following stronger economic growth and higher yields. S&P 500 sector results for 2024: Communication Services 40.23%, Technology 30.60%, Financials 30.50%, Consumer Discretionary 30.14%, S&P 500 25.00%, Utilities 23.43%, Industrials 17.30%, Consumer Staples 14.87%, Energy 5.72%, Real Estate 5.22%, Health Care 2.58%, and Materials -.04%. Value, defensive, and interest-rate sensitive stocks lagged in 2024 with growth sectors outperforming. The story of the fourth quarter was strong returns from financial stocks with the Trump administration indicating deregulation of the banking and consumer finance sectors. The health care sector sold off with president elect Trump indicating price controls for the pharmaceutical industry.
Based on current consensus earnings forecasts, the forward 12-month P/E ratio for the S&P 500 is 21.4X, more expensive than the five-year average P/E of about 19.7X. Currently, the market is estimating 14.8% earnings growth on 5.8% revenue growth in 2025. Profitability remains high for S&P constituents, with net profit margins currently at 12.2%, compared to 5-year average profit margins at 11.5%. Average equity strategists’ bottom-up price targets for the S&P 500 in 2024 are at 6,722.84, 13% higher than current trading levels. We are expecting a more normalized return environment for equities in 2025, after 2 years of S&P 500 returns greater than 20%. The late 1990’s was the last time the S&P 500 posted 20% returns in back-to-back years. However, we do see a continued broadening of equity returns out of technology and into other areas of the market that have not participated as dramatically in the equity rally. Strategic moves out of domestic large capitalization investing into small cap and international stocks took a step back in the fourth quarter, as interest rates moved dramatically higher. However, the valuation discount in international and small capitalization equity markets are hard to ignore.
During their December 2024 meeting, the Federal Reserve initiated an anticipated 25 basis point cut, dropping the fed funds rate to 4.25% to 4.5%. However, a stronger economy saw the fed indicate only another 50 basis points of interest rate cuts in 2025, which was 50 basis points less than expectations. The Fed also indicated a neutral rate around 3% as inflation remains sticky around the current level. Latest economic projections show an economy that is growing at much higher levels than earlier projections, but with slightly higher inflation remaining and a labor market that is losing momentum but is stable. The Fed estimates full year 2024 GDP to be 2.5% in 2024, revised up from 2.0% GDP growth estimates that were forecasted in September. As measured by the Fed’s preferred inflation gauge, the Core Personal Consumption Expenditures Index, inflation is estimated to end 2024 at 2.8%, slightly higher than third quarter projections at 2.6%. Unemployment also stabilized, exiting 2024 at 4.2% after peaking in July at 4.3%. As of year-end, 10-year treasuries now yield 4.57%, up from 3.78% at the end of the third quarter. Equity markets corrected, the dollar strengthened, and yields rose dramatically following this unanticipated hawkish move by the Fed. However, the economy exits 2024 in solid footing.
The 10-year treasury yield moved higher in 2024, starting the year at 3.88% and ending the year at 4.57%. Longest duration bonds underperformed shorter duration issues as yields fell more for short duration assets than longer dated issues following the fed’s rate cuts in 2024. 20+ year treasuries were down 7.98% in 2024, while intermediate treasuries were up 2.42%. In a risk-off trade, higher credit quality outperformed the lowest credit quality issues. Aaa rated bonds within the Barclays U.S. Aggregate Index were up 3.07% in 2024, while Baa rated bonds returned 2.70% during the same period.
The Bloomberg Dollar Spot Index finished 2024 with the dollar having strengthened 7.98% compared to our trading partners. International investors are forecasting higher growth, inflation, and relative interest rates following our presidential election. Light crude oil futures remained stable in 2024, with WTI oil futures minimally rising to $71.72 from $71.65 at the end of 2023. 30-year mortgage rates rose from 6.99% at the end of 2023 to 7.28% by the end of the year, while 30-year treasuries rose 75 basis points from 4.03% at year-end 2023 to 4.78% at the end of 2024.
According to the Bureau of Labor Statistics, the November employment report showed 277K jobs gained during the month, well above estimates for 200K, and with numbers for the prior two months revised higher by 56,000 jobs. The November jobs report alleviated concerns that the labor market is deteriorating and showed improvement in the labor market after several weak numbers at the beginning of the summer. The November jobs number reported unemployment at 4.2%, falling from 4.3% in July, but well off the cycle low unemployment rate at 3.5% in March or 2023. The labor force participation rate in November was 62.5%, up from the pandemic trough of 60.2% in April of 2020. For November, average hourly earnings rose 4.0%, below the recent wage inflation numbers that were averaging greater than 5% for most of 2023. The latest jobs numbers indicate a slower trend in wage inflation and signs that the restrictive monetary policy is finally working its way through the economy. Additionally, the prospect for an impending recession is not in the numbers and market sentiment is moving more towards the soft-landing scenario.
Retail sales (ex gasoline and motor vehicles) in November increased .7% from the prior month, surprising economists who had predicted a .5% increase. Annualized retail sales were up 3.8% over the past year, compared to the consumer price index’s measure of inflation up 2.7%. After some soft numbers at the beginning of the summer, the economy appears to have stabilized over the course of the late summer months. Consumer spending remains healthy for items not related to consumer finance and higher rates as wage growth and low historical unemployment have kept the consumer strong and inflation in basic goods have slowed. Gasoline station sales were down 2.9% from the prior year as energy prices stabilized in 2024, providing a boost to consumer discretionary spending on other items. Department store sales were down 1.1% from the prior year. Building materials and supplies were down .7%. E-commerce and mail-order houses ended the 12-month period with a 7.9% sales gain. Auto sales were up 2% from the prior year. Restaurant spending was up 4.9%, furniture store sales were down 3.3%, health care spending was up 2.7% and clothing and accessories were up 2.6%. On a positive note, food costs were only up 2.2% from the prior year, well below current year over year inflation numbers as supply chains are recovering from the pandemic. With consumer spending two-thirds of our economy, we are seeing consumption growth remaining resilient. With wage growth up 4% over the prior year and real disposable income also up 2.6%; the income side of the equation is helping to defray some of the inflationary and higher financing pressures. Worse case scenarios of a collapse in consumer spending are thankfully not materializing.
We are expecting a more normalized return environment for equities in 2025 with valuations needing to also normalize after the strong rally over the past 2 years. With the S&P 500 earning 20% returns or better for the past 2 years, equity levels are running into lofty 2025 expectations, despite strong fundamentals. Equity markets have come off recent highs as investors are zeroing in on interest rates moving higher on new expectations for stronger growth policies with the Trump administration. The growth scares of the summer months have subsided as inflation and rates become a bigger focus. While we are prepared for some equity weakness in the first half of 2025, we see earnings providing support for equity returns over the course of the year. We see a continued broadening of equity returns out of technology and AI themes and into other areas of the market that have not participated to the same degree. A strong 4th quarter earnings season and positive forward guidance for 2025 could very well flip the narrative that stronger growth is a negative, despite the Fed being on hold for longer and rates staying higher. In short, earnings drive stock returns and the anticipated 15% earnings growth for 2025 is well above historical norms. Additionally, Small capitalization and international equity valuations remain attractive compared to large capitalization peers once the rise in interest rates stabilizes.
Within the fixed income markets, interest rate, fed policy, and market traders see two more twenty-five basis point interest rate cuts in 2025, following stronger consumer spending and GDP growth going into 2025. This was a surprise to the market that was anticipating four 25 basis point fed cuts in 2025. Ten-year treasury rates are currently at 4.68% as of January 8, up eleven basis points from the end of the year, and up 93 basis points from the end of the third quarter. The corporate bond market is now offering yields greater than 5% for maturities greater than 5 years. We see rates moving lower over the intermediate term, and we see current interest rate levels as an opportune period to extend portfolio duration, invest excess cash in fixed income markets, or take some profits from equity portfolios to add to fixed income exposure.
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Click here to read the Q4 2024 Market Summary.
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Data Sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Dept. of Commerce (GDP, retail sales, housing); Institute for Supply Management (manufacturing/services). Factset (S&P 500 statistics); Performance: based on data reported in Bloomberg (indexes, oil spot prices, foreign exchange); News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources, such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied upon as financial advice. Forecasts are based on current conditions, subject to change, and may not come to pass. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.