Highlights for This Week Include:

• Stocks and other risky assets had another good year in 2024, with the S&P 500 Index up 25% after a 26% rise in 2023. Stocks benefitted from healthy economic growth that supported strong profit growth while gradually falling inflation allowed the Federal Reserve to begin lowering interest rates.
• Our outlook for 2025 calls for further economic growth that should translate favorably for stock prices. The pattern of recent quarters shows economic growth continues to drive better-than-expected earnings growth, and the incoming data suggests this will be the case for the upcoming fourth quarter earnings season. See below for details.

2024 Asset Class Performance Review

Stocks and other risky assets had another good year in 2024, with the S&P 500 Index up 25% after a 26% rise in 2023. This is just the 7th time in the past 100 years for two consecutive years of 20%+ gains, the last coming in the late 1990s. Stocks benefitted from healthy economic growth that supported strong profit growth while gradually falling inflation allowed the Federal Reserve to begin lowering interest rates.

Ten of eleven sectors of the economy posted positive gains in 2024, led by Communication Services (+40.2) and Technology (+36.6%), which are major beneficiaries of the investments taking place in Artificial Intelligence (AI) and other advanced technologies. Financials (+30.6%) benefitted from economic growth, Fed interest rate cuts, and the prospects of lower regulation under the Trump administration. Consumer Discretionary (+30.1%) benefitted from a resilient consumer and Fed rate cuts that should support future consumption. Utilities (+23.4%) are beneficiaries of the massive energy requirements for AI data centers.

The Materials sector was flat for the year, the only sector that didn’t post a gain. Persistently sluggish manufacturing conditions and structural Chinese economic headwinds continue to plague the sector. Health Care gained only 2.6% due to concerns over future healthcare policy with the new administration.

Most international stock markets posted gains, led by Taiwan’s 34% gain and its significant technology exposure. China (+19%) outperformed the 17.5% gain of the MSCI All Country World Index after a period of significant underperformance and with the promise offered by government stimulus plans.

Investment grade bonds posted positive gains with the Bloomberg Aggregate up 1.3% as interest rates continue to show signs of stabilization. Cash (+5.3%) and Commodities (+5.4%) also posted respectable gains for the year.

Outlook for 2025 Calls for Further Economic Growth that Should Support Profit and Stock Gains

Our outlook for 2025 calls for further economic growth that should translate favorably for stock prices. The job market is stable, and wage gains, while slowing, remain positive. An accruing amount of savings and steady employment bodes well for household spending, which drives the majority of economic activity.

While major trade action from the Trump administration and the handling of immigration could alter the otherwise sanguine landscape, corporate profits are expected to climb meaningfully, which will be needed to justify the stock market’s lofty valuation.

The tech and tech-related companies found in Technology, Communications, and Consumer Discretionary remain well positioned with secular growth opportunities. Industrials will benefit from the spending directed at reshoring industries and a potential uptick in capital expenditures should spirits continue to lift in the business community. Also, historically staid Utilities should continue to benefit from the exponential demand for energy needed to supply the tech industry and the decarbonization evolution. Favored secular themes include defense companies, cybersecurity, generative artificial intelligence, genomics, and robotics.

Recent Economic Readings

The incoming economic data remains consistent with further economic growth, including positive business and consumer surveys, and positive retail sales. The Atlanta Fed is now calling for fourth quarter economic growth of a sturdy 2.6%, consistent with further healthy profit growth.

Thoughts on Recent Market Dynamics

While stocks have recently been consolidating 2024’s strong gains, the major stock averages remain in uptrends established off 2022’s market low. Given the positive economic growth that we continue to see and the fact that corporate profits and future estimates remain sturdy, we remain positive on the economy and stocks.

The pattern of recent quarters shows economic growth continues to drive better-than-expected earnings growth, and the incoming data suggests that this will be the case for the upcoming fourth quarter earnings season.

Communication Services (+20%), Technology (+18%), Financials (+12%), and Utilities (+19%) are expected to see the best 4Q earnings growth. Energy (-29%), Industrials (-5%), and Consumer Staples (-2%) are expected to see the worst. Full-year earnings growth for the S&P 500 is expected to be 9% in 2024, and early estimates for 2025 are for 13% y/y growth.