US equities held their gains in the fourth quarter amid continued economic data, interest rate cuts from the Federal Reserve, and optimism regarding policy shifts after the recent election. As a result, the S&P 500 ended the year up over 20%, significantly outperforming other international markets as well as domestic small and mid-caps. Indeed, it was a year of the strong getting stronger, with both the US market extending its outperformance globally as well as technology companies continuing their dominance domestically. However, recent weakness is signaling the need for continued economic strength as well as details regarding new policies to maintain valuations.
In terms of fundamentals, the U.S. economy grew at an annualized rate of 2.7% in Q4, supported by robust consumer spending and productivity gains, while the labor market remained stable with wage growth outpacing inflation. Inflation continued to fall throughout the year but stalled in the latest readings slightly above the Fed’s 2.0% target, primarily due to high housing costs. In response, the Fed cut interest rates three times during the year, closing 2024 at 4.25%, but signaled fewer cuts going forward due to this inflation stickiness. This caused a reversal of bond yields at the end of the year, stalling some of the momentum in stocks attributable to the falling rate environment.
Nevertheless, the solid earnings environment and expectation of a pro-growth agenda kept the market near highs despite the turbulence. Notably, mega cap stocks such as AI bellwether Nvidia and adjacent players like Amazon and Meta held their gains in December even as the broader market softened. They had help from more traditional blue chips as well, such as Walmart, which had a stellar year driven in part by technology which is enhancing its e-commerce and inventory management. Banks were another blue-chip sector that notably outperformed, boosted by improved lending conditions and the anticipation of a better deal making environment in 2025.
The expectation of a pro-growth agenda was reflected sharply in the initial rally after the election, with pro-cyclical sectors like financials, industrials, and small caps benefiting. On the flipside, consumer-facing sectors challenged by inflation and high interest rates notably lagged. However, over the course of December much of this “Trump trade” reversed, with proposed tariffs by the Trump administration raising concerns about potential disruptions to global trade. A looming trade war with China poses additional risks. As the saying goes, “the proof is in the pudding”, and the market now seems to be now shifting to a “show me” attitude regarding policy. Details on proposed tariffs, such as the magnitude and exemptions, will be a key theme in the coming months. Also top of mind will be the deficit, with tax cuts likely to be offset by significant cuts to the public sector.
Overall, the fourth quarter of 2024 was marked by strong market performance, robust economic growth, and resilient corporate earnings, despite inflationary pressures and geopolitical challenges that tempered optimism late in the year. The period underscored the complex dynamics shaping a recovering global economy heading into 2025. As we begin the new year, we remain cautiously optimistic on markets given the underlying strength of the economy, but recognize the new year brings renewed uncertainty on several fronts. Of particular focus will be trade policy and the staying power of key 2024 themes such as the AI trade, interest rate cuts, and US outperformance. We will be watching closely for shifts in these areas as well as for opportunities to add value in portfolios when volatility presents itself.