Quarterly Investment Research Note – January 7th, 2025

2024 Market Recap Summary

• Despite a choppy fourth quarter, 2024 was a generally strong year for global equity portfolios. The S&P 500 led markets once again, posting a +25.02% return. U.S. Large-cap Growth stocks, fueled by continued enthusiasm over Artificial Intelligence (AI), maintained their leadership, gaining +32.46% for the year.¹

• Moving down the market-cap spectrum, the Russell 2000 returned +11.54% for the year. Outside the U.S., the MSCI EAFE and MSCI Emerging Markets indices posted returns of +3.82% and +7.50%, respectively. International equities faced a significant drag on returns due to adverse currency impacts.²

• Earnings rebounded from 2023’s tepid growth, with 2024 earnings expected to rise by 9.9% as fourth-quarter results are set to be announced. Looking ahead, optimism remains strong, with consensus estimates for earnings growth of 12.5% in 2025 and 13.2% in 2026.³

• The bond market experienced another year of high volatility in interest rates but ended positive, with the Bloomberg U.S. Aggregate Bond Index returning +1.25% for the year. The benchmark 10-year U.S. Treasury yield hit a low of 3.59% in September but saw two peaks above 4.6% in April and December, with a year-high of 4.74%.⁴

• The Federal Reserve reduced interest rates for the first time since 2020, cutting its target rate by a total of 1%: a 0.50% cut in September, followed by 0.25% cuts in November and December. However, at their final meeting, the Fed adopted a hawkish stance, signaling caution on further rate cuts and tempering market expectations of accommodative policy.

• The U.S. economy once again demonstrated resilience despite higher interest rates. Markets navigated a summer growth scare sparked by slowing job creation, a slight rise in the unemployment rate, and continued weakness in manufacturing. Economic growth improved through the year, with real GDP rising by +1.62%, +2.95%, and +3.03% annualized during the first three quarters, respectively. The economy added 1,984,000 jobs in the first 11 months of 2024, with the unemployment rate holding steady at 4.2%.⁵

• Inflation made marginal progress toward the Fed’s 2% target, with the latest reading on Core PCE at 2.8% as of November 2024, down from 3.2% in November 2023. The stubbornness of inflation’s decline is largely attributable to a plateau in housing costs, which remain above pre-pandemic levels. This dynamic has been a key factor driving the Fed’s guarded outlook.⁶

4^th Quarter 2024 Market Recap

The 4^th quarter was an eventful three months in financial markets with US elections in November and multiple Fed meetings in addition to the usual course of market activity.  The S&P 500 finished the quarter up +2.41%, bringing its total return for the year up to +25.02%.  Since 1928, this is only the 4^th time that the S&P 500 has gained 25% or more in back-to-back years (1935-1936, 1954-1955, and 1997-1998).⁷

The S&P 500 avoided a correction of -10% during the year, with the maximum pullback limited to -8.45%. Volatility was relatively subdued for the large-cap index, as the CBOE Volatility Index (VIX) averaged 15.55 in 2024, down from 16.85 in 2023 and 25.64 in 2022.⁸

Following the November elections, U.S. equities experienced a strong rally. The S&P 500 gained +5.87% in November alone, reaching an all-time high of 6,099.97 for the Index in early December. The Russell 2000 Index was up +10.97% during November, though it ended the fourth quarter flat after giving up the gains.   In contrast, international equities struggled, weighed down by a strengthening U.S. dollar and concerns over potentially unfavorable domestic trade policies. During the fourth quarter, the MSCI EAFE and MSCI Emerging Markets indices both fell by over -8%.⁹

The post-election US rally was halted when the Fed delivered a “hawkish cut,” causing the market to re-evaluate future expectations of rate cuts.  Most markets were generally weak in December, especially in the last 2 weeks of the year, an exception being large-cap growth stocks in the US.  Value stocks lost -6.8% during December compared to +0.88% for Growth stocks.¹⁰ 

The breadth of the market returns across style and sector that was observed in the 3^rd quarter ultimately did not persist in the 4^th quarter.  The average S&P 500 stock was down -1.87% in the 4^th quarter and returned +13.01% for the year.  The “Magnificent 7” group* averaged a +60.54% return during 2024, thereby contributing over half of the S&P 500’s gain for the year and driving the index higher than its average component.    The Dow Jones Industrial Average fell for 10 consecutive trading days in the December downturn, the longest losing streak since 1974.¹¹

During the 4^th quarter, 7 out of the 11 sectors had negative returns.  Consumer Discretionary was the best performer in the quarter and Communications Services and Technology stocks were also positive.  Financials were a perceived beneficiary of election results and held onto those gains during the quarter – deregulation and a more robust future for mergers and acquisitions boosted the outlook for the sector.¹²

Health Care stocks are a notable underperformer, the sector lost -10.30% in the quarter.  Health Care lagged in part due to potential regulatory changes but has been a weak area all year, it was the worst performing sector during 2024.  Real Estate and Utilities stocks felt pressure from rising bond yields during the quarter as rate sensitive sectors.¹³

After a 31% outperformance gap for Large-cap Growth over Large-cap Value in 2023, Growth continued its momentum in 2024 with a 14% advantage, including slight outperformance in the fourth quarter. Communication Services and Technology stocks, spearheaded by the “Magnificent 7,” delivered another robust year, fueled by profits from the AI buildout. Value stocks have now lagged Growth stocks in 8 out of the past 10 years, with 2022 and 2016 being the exceptions.¹⁴

Overall, 2024 was an exceptionally strong year for equities, driven by U.S. large caps yet broadly positive across various sectors, with many areas delivering double-digit returns.   Earnings have contributed significantly to this year’s returns but so has multiple expansion, which bears watching as we enter 2025.  The current forward P/E ratio for the S&P 500 stands at 21.4x, slightly below the peaks reached at the end of 2021 and a few notches lower than the all-time highs during the dot-com bubble of the late 1990s.¹⁵

In the bond market, interest rate volatility shook investors during the 4^th quarter.  A combination of improving economic growth, creeping inflation expectations and the election reaction caused rates to rise unabated.  The Bloomberg US Aggregate Bond Index was down -3.06% during the quarter but finished the year up +1.25%.  The yield curve steepened during the 4^th quarter as the long-end rose in response to the above-mentioned factors while the short-end fell in response to Federal Reserve policy.¹⁶  

Investment-grade Corporates and High Yield Corporates were up +1.13% and +8.19% for the year, respectively.  High Yield bonds fared much better than their Investment Grade counterparts due to lower interest rate sensitivity (shorter duration) and benefited from further spread compression as corporate profits and economic conditions remained healthy. Bank loans are another example of this trend, they were up +9.05%; these loans are typically floating-rate instruments, so they benefit from rising rates.¹⁷

Putting equity and fixed income together, the benchmark 60/40 portfolio (60% S&P 500 / 40% Bloomberg US Aggregate Bond) returned +15.51% for the year and +0.68% in the 4^th quarter, another solid year for balanced investors.¹⁸ 

The Economy, Inflation, and the Fed

The economy in 2024 continued to defy common intuition that the long and variable lags of higher interest rates would slow down the consumer and thus the economy.  While the job market has slowed, it is still growing with an unemployment rate that is higher than the historical lows of 2023 but still indicative of a healthy labor market.  Productivity increased further in 2024, owing to the persistent ingenuity of the country:

Consumption has made up 68% of US GDP growth since the year 2000 and continues to be the driving force behind today’s economic growth.¹⁹ Today, US household net worth is at an all-time high- increasing by over $49 Trillion since the end of 2019.    What’s more, the household debt service ratio (debt payments as a % of disposable income) sits at 11.3%, below the 11.7% mark at the end of 2019 – a signal cash flows are abundant for the consumer to continue to consume and grow the economy.    The economy made significant progress towards the “soft landing” scenario where economic growth, inflation and labor markets moderate allowing the Fed to move the policy rate back towards neutral.²⁰

The economy grew by a greater amount in each of the first three quarters of the year on a real basis (after inflation) with the latest estimate from the Atlanta Fed for the 4^th quarter at 2.7% as of 1/7/25.²¹  This year, prior year revisions came out that revised up growth during a weak period during 2022.

Inflation continued to decline during the year, although not as much as fast as expected to start the year.  However, it was enough for the balance of the Fed’s dual mandate to alter its focus from fully on price stability to include full employment……with an eye towards elongating the expansion.  The persistency of inflation above the Fed’s 2% target is the cause of the Fed’s recent stance of caution at the end of 2024. 

With a wrap on an exceptional two-year period for investors, rebounding from a challenging 2022, we look forward to 2025 and beyond.  We will again follow-up on this recap with a forward-looking outlook for markets this month, please reach out with any questions at any time!

Footnotes:

1. Morningstar Direct data
2. Morningstar Direct data
3. Yardeni Research
   https://yardeni.com/charts/yri-earnings-outlook/
4. Morningstar Direct data
5. St. Louis Fed FRED
   https://fred.stlouisfed.org/series/PAYEMS https://fred.stlouisfed.org/series/UNRATE https://fred.stlouisfed.org/series/GDPC1
6. St. Louis Fed FRED
   https://fred.stlouisfed.org/series/PCEPILFE
7. Morningstar Direct data
8. St. Louis Fed FRED
   https://fred.stlouisfed.org/series/VIXCLS
9. Morningstar Direct data
10. Morningstar Direct data
11. Morningstar Direct data
12. Morningstar Direct data
13. Morningstar Direct data
14. Morningstar Direct data
15. JPMorgan Guide to the Markets
    https://am.jpmorgan.com/content/dam/jpm-am-aem/americas/us/en/insights/market-insights/guide-to-the-markets/daily/protected/mi-daily-gtm-us.pdf
16. Morningstar Direct data
17. Morningstar Direct data
18. Morningstar Direct data
19. JPMorgan Guide to the Markets
    https://am.jpmorgan.com/content/dam/jpm-am-aem/americas/us/en/insights/market-insights/guide-to-the-markets/daily/protected/mi-daily-gtm-us.pdf
20. St. Louis Fed FRED
    https://fred.stlouisfed.org/series/TDSP https://fred.stlouisfed.org/series/BOGZ1FL192090005Q
21. Atlanta Fed GDPNowhttps://www.atlantafed.org/cqer/research/gdpnow

* The “Magnificent 7” is a basket of seven tech-focused large-cap stocks in the US that drew significant media attention during 2023: Alphabet ( GOOGL), Amazon (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA).

The views expressed herein are those of John Nagle on January 7^th, 2025 and are subject to change at any time based on market or other conditions, as are statements of financial market trends, which are based on current market conditions. This market commentary is a publication of Kavar Capital Partners (KCP) and is provided as a service to clients and friends of KCP solely for their own use and information. The information provided is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal or tax advice. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s investment portfolio. All investment strategies have the potential for profit or loss and past performance does not ensure future results. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. The charts and graphs presented do not represent the performance of KCP or any of its advisory clients. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results.  There can be no assurances that a client’s portfolio will match or outperform any particular benchmark. KCP makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information. The information is subject to change and, although based on information that KCP considers reliable, it is not guaranteed as to accuracy or completeness. This information may become outdated and KCP is not obligated to update any information or opinions contained herein. Articles herein may not necessarily reflect the investment position or the strategies of KCP. KCP is registered as an investment adviser and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by securities regulators nor does it indicate that the adviser has attained a particular level of skill or ability.