The stock market experienced significant gains in 2024, overcoming challenges and turning potential negatives into positives. Below is a summary of the key developments and factors that influenced market performance:
Key Developments:
- Treasury Yields: Treasury yields rose due to stronger-than-expected economic growth, which supported market sentiment.
- Geopolitical Conflicts: Israel's conflict with Hamas expanded to include Hezbollah but remained a proxy battle, avoiding a wider regional war. Russia's war with Ukraine intensified but remained confined to their respective territories, primarily in Ukraine.
- Inflation: Inflation stayed above the Federal Reserve's 2.0% target, averaging 2.4%. However, it declined from 2.7% at the end of 2024.
- Federal Reserve Policy: The Federal Reserve did not cut interest rates as much as anticipated, but economic growth remained robust, offsetting concerns.
- Market Breadth: Market breadth was narrow for much of the year, with mega-cap stocks outperforming and driving the indices
- Mid-Year Volatility: The market experienced a summer decline due to unwinding yen-based carry trades, disappointing earnings from major companies like Tesla (TSLA) and Alphabet (GOOG), and concerns over semiconductor export restrictions to China.
- These dips were viewed as buying opportunities, as the market quickly recovered
Market Returns:
- The S&P 500 achieved a 20%+ price return for the second consecutive year.
- Nasdaq Composite: +28.6%
- Dow Jones Industrial Average: +12.9%
- S&P Midcap 400: +12.2%
- Russell 2000 (Small-Cap): +10.0%
- Equal-Weighted S&P 500: +11.0%
- The Vanguard Mega-Cap Growth ETF (MGK) led with a 32.3% gain, reflecting the dominance of mega-cap stocks.
AI Leadership:
- Role of AI Stocks: Mega-cap stocks, especially those leading in AI, dominated market performance. NVIDIA (NVDA) was a standout, as its GPUs played a critical role in data centers, large language models, and generative AI.
- Key Companies Benefiting from AI Enthusiasm: Apple (AAPL), Oracle (ORCL), Broadcom (AVGO), Salesforce (CRM), Meta Platforms (META), Alphabet (GOOG), Amazon.com (AMZN), Microsoft (MSFT), and Tesla (TSLA).
- Earnings Growth: NVIDIA’s strong earnings reports fueled investor enthusiasm, reinforcing the AI growth narrative and boosting related stocks
Economic and Policy Highlights:
- Recognition of Economic Resilience: The economy avoided a recession, with disinflation trends encouraging optimism. Earnings growth remained robust, with positive forecasts for 2025.
- Federal Reserve Actions: The Fed implemented a 50-basis point rate cut in September, followed by 25-basis point cuts in November and December
- Political Stability: The absence of a contested U.S. presidential election and expectations of pro-business policies from the incoming administration supported investor confidence.
- Bitcoin Surge: Bitcoin surpassed $100,000, driven by speculative fervor and fear of missing out on further gains.
Challenges:
- Higher Interest Rates: The 10-year Treasury yield increased from 3.64% in September to 4.64% by late December, reflecting concerns about inflation and fiscal deficits.
- Small and Mid-Cap Underperformance: Small-cap and mid-cap stocks faced selling pressure in December due to rising interest rates, diverging from mega-cap trends.
Additional Insights:
- Federal Reserve’s December Retreat: The Fed tempered its forecast for rate cuts in 2025, citing slowed progress on inflation and potential inflationary pressures from President-elect Trump’s proposed tariffs and mass deportation policies
- Market Valuations and Risks: The S&P 500 trades at 21.9x forward twelve-month earnings, a 20% premium to its 10-year average, reflecting optimism but leaving little room for error in earnings reports
- Economic Performance: Real GDP growth averaged 2.6% for the first three quarters and accelerated to an estimated 3.1% in Q4, supported by a strong labor market and rising real incomes fueling consumer spending.
- Earnings Growth: Double-digit earnings growth (10%) was led by mega-cap companies and underpinned by robust economic growth.
- 2025 Expectations: Outperformance in 2024 has raised the bar for 2025 across earnings, the economy, politics, and mega-cap stock performance. Rising long-term rates remain a key risk to watch.
Conclusion:
2024 was a strong year for the stock market, with major indices reaching record highs. Despite challenges, the market showed resilience, driven by mega-cap leadership, robust earnings growth, and optimism about the future of AI and economic stability. Investors’ focus now turns to 2025, with questions about valuations, policy decisions, and growth potential taking center stage.
