4th QUARTER 2024 NEWSLETTER

Contributors

Happy New Year! We hope the start of 2025 has greeted you with good health, connections with family and joyful memories from 2024. As we step into the new year, we believe it is a time to reflect on what has occurred over the last 12 months.

In 2024, we witnessed a soft economic landing (no recession) that has propelled various indices to all-time highs. This upward move was fueled by strong corporate earnings and forward guidance, AI enthusiasm, healthy consumer spending, a resilient labor market, corporate stock buybacks, easing monetary policy, and technological innovation. The stock market’s remarkable run has brought with it a blend of optimism and skepticism. We believe it is important to identify where challenges may befall us and where we may take advantage of an apparent paradigm shift in economic outlook.

There were clear trends that emerged in 2024 that we are now watching as potential headwinds. They include over exuberance within AI, cyberattacks, foreign political crises, global wars, private credit inflows, and excessive cryptocurrency participation.

In many ways, investors stand at a critical juncture. Indeed, with certain areas of the market dramatically outperforming others, it may feel compelling to chase where markets appear to be going on an assumption that momentum has no end. Of course, in truth, it does.

NY Times columnist Morgan Housel was recently quoted saying: “All past declines look like an opportunity, all future declines look like a risk.” With this notion in mind, we believe it is essential now more than ever to reflect on lessons learned from a disciplined forward-looking approach to investing. As well, we intend on keeping upcoming policy changes and goals in mind – this includes deregulation, lower energy costs, tax cuts and immigration reform – which could boost an already strong US economy further.

Let’s take a closer look.

Equity Markets:

As we have discussed in previous commentary, the Magnificent 7 stocks have been a significant driving force behind S&P 500 returns over the last few years. However, we believe a broadening earnings recovery is underway and we have already started to feel the shift.

Here is a graphic that depicts the dramatic role the Mag 7 stocks have played in S&P returns. Last year alone, the S&P 500 ex-Mag 7 returned 10% while the Mag 7 alone returned 48%. This performance delta is remarkable and unprecedented.

*Provided by J.P. Morgan

While we do believe the Mag 7 stocks will likely experience a slower growth rate in 2025, we also anticipate other areas of the market are poised for greater participation. Between moderating rates and lower inflation, accelerating M&A and IPO activity, strong corporate earnings, and election-related uncertainty behind us, investors can clearly focus on their own unique goals, timeframes and opportunities ahead.

Further, most economic forecasts indicate the economy will continue its expansion, albeit at a slower pace, at around 2-2.5% for 2025. And astonishingly, FactSet reported analysts forecasting even stronger earnings growth of approximately 15% in 2025 with a forward P/E ratio of 21.4 which is above the 5-year average of 19.7.

In many cases, we have already made slight changes to allocations – leaning into areas that may benefit from this paradigm shift. For example, we have begun allocating slightly towards regional banks and FinTech companies, AI supply chain partners, and retail discretionary.

Fixed Income Markets:

The economy avoided a recession in 2024 despite historic rate hiking we experienced between 2022 and 2023. On the monetary policy side, inflation continues to abate and inch towards the Federal Reserve’s 2% target. Still, we believe there are potential headwinds which will need to be monitored. Such headwinds are in part driven by the potential impact of policy changes that may affect interest rate volatility and drive higher inflation. These factors include trade tariffs, immigration reform and tax cuts; all of which have the potential to impact bond prices and spreads.

Fiscal policy presents a greater unknown. We will continue to do our homework and monitor fiscal spending which, if left unchecked, could lead to potentially higher inflation. However, we anticipate the new administration will rollout a more restrained fiscal plan in the coming months as government spending has become a major topic of conversation among investors.

With our stated observations in mind, domestic equity markets will likely be more volatile than last year. But still, we expect U.S. indices to move higher yet again in 2025 and remain the best place to be allocated. As well, there should be broader participation across sectors with more than just a handful of megacap companies dominating the advance. This expectation also means broader diversification will likely be more beneficial during this chapter versus the past few years.

With this backdrop in mind, we anticipate maintaining an underweight in international equities, at least in the short-term, with some exceptions in emerging markets. For diversified multi-asset portfolios, we also anticipate bond prices will remain relatively range bound – complementing equity allocations – while affording fixed income investors the benefit of current yields which are higher than cash alternatives. In essence, the coming year could well reward long term investors yet again.

Wishing you all good things in 2025!