executive summary
- S&P 500 records best two-year returns in 25 years
- S&P 500 earnings per share are expected to grow 9.4% in 2024 and 14.8% in 2025
- Rates still rising in the face of 100 basis points (bps) cut from FFR
- Fed leads Trump policy in latest SEP forecast
- Dollar surges to two-year high
“So I would say, in the short term, the election will not have an impact on our policy decisions.” – Chairman Jerome Powell, November 7th Federal Open Market Committee Press Conference
“Some did take a very preliminary step to start incorporating highly qualified estimates of the economic impact of the policy into their forecasts at this meeting and saying so at the meeting.” – Chairman Jerome Powell , December 15th Federal Open Market Committee Press Conference
U.S. stocks moved higher in 2024, with major equity benchmarks posting double-digit returns, on a positive backdrop of strong economic activity, strong corporate earnings growth and loose monetary policies from central banks around the world.
Economic data showed strong GDP growth (+2.7% year-on-year), low unemployment (4.1%), rising consumer spending (+3.7%) and falling inflation (core PCE up 2.8% year-on-year), erasing the negative impact of the previous year. The lingering economic recession worries about the interest rate hike cycle (+525bps). Data from FactSet shows that corporate profits are rising along with the economic tide. S&P 500 Index profits are expected to grow by 9.4% in 2024 and 14.8% in 2025. Although inflation has not yet reached the Fed’s 2% threshold, its downward trend provides enough assurance for the FOMC to cut interest rates three times, totaling 100 basis points, at its final three meetings in 2024, thereby weaning itself from its restrictive policies.
In 2024, the top performers are the Nasdaq (+29.6%), Nasdaq 100 (+25.9%) and S&P 500 (+25%), driven by the seven major indexes (+67.3%) down, moving higher from another strong year. Over the past two years, the broad-based S&P 500 has posted a total return of 57.8%, its strongest two-year return in 25 years (1998) and the fifth-highest return since at least 1970 (54 years). The Nasdaq 100 rose 95.3%, recording its fifth-highest two-year return since its inception (38 years ago), while the seven major indexes’ two-year return was 246.4%.
In absolute terms, small caps performed well, with the S&P MidCap 400 (+13.9%) and Russell 2000 (+11.5%) recording double-digit gains, although each index significantly underperformed the large cap-weighted index. However, they did perform more in line with the S&P 500 Equal Weight Index (+13%) and the Nasdaq 100 Equal Weight Index (+7.3%).
Therefore, large-cap growth, as represented by the Russell 1000 Growth Index (+33.4%), significantly outperformed small-cap growth (+15.1%), large-cap value (+14.3%), and small-cap value (+8%).
Ten of the 11 large-cap sectors ended 2024 higher, with four of them gaining more than 30%. The top performers were Communications (+40.2%), Technology (36.6%), Finance (+30.5%) and Discretionary (+30.1%). At the other end of the performance spectrum were materials (-0.04%), healthcare (+2.6%) and real estate investment trusts (5.2%).
Likewise, 10 of 11 small-cap stocks gained, with five gaining more than 15%. Technology (+23.6%), Staples (+21.2%), Communications (+19.1%), Industrials (+17.2%) and Financials (+16.6%) were the top performing sectors, while Energy (-6.1%) was the only plates in red.
While the “Big Seven” drove the outperformance of the major stock indexes, many sectors also saw strong growth, including the KBW Bank Index (KBWB ETF, +36.7%), cloud computing (SKYY ETF, +35.9%), broker-dealers (IAI ETF, +34.4%), Software & Services (XSW ETF, +25.8%), Cybersecurity (HACK ETF, +23.5%), and Aerospace & Defense (XAR ETF, +23.3%).
Interest rates and the Fed
It’s been a rollercoaster year for interest rates and the timing of the start of the rate-cutting cycle. At the beginning of 2024, the market expected seven interest rate cuts of 25 basis points before the end of the year. Over the next four months (to early May), hawkish interest rate repricing led to market expectations of just 25 basis points of rate cuts by the end of the year. In mid-summer, weak economic data repriced interest rates in a dovish direction. By the end of the year, the Fed had lowered the overnight FFR by a total of 100 basis points at three meetings in September (50 basis points), November (25 basis points) and December (25 basis points). The short end of the U.S. Treasury curve is lower in 2024, while the belly of the curve (starting with the 3-year term and ending with the long 30-year term) is higher.
UST 10 and 2 basis point spreads quickly emerged following the 50 basis point rate cut in September, reversing from a record 26 months into positive territory (bear market steepening).
Ironically, interest rates rise sharply after the September FOMC meeting until the end of 2024. Treasury yields rose 63 basis points, from 3.61% to 4.24%. Some critics were quick to attribute the spike in interest rates to policy errors by the Federal Reserve, but other market interpretations are more likely.
In the first five months leading up to the September Federal Open Market Committee (FOMC) meeting, UST 10-year and 2-year Treasury yields fell sharply by 100 basis points and 140 basis points, respectively, partly due to a slowdown in macro data over the summer. The Fed has been criticized no Interest rate cut on July 31Yingshi Following the release of economic data next week, the Federal Open Market Committee (FOMC) announced that the monthly unemployment rate (July) surged to 4.3% from 4.1%, versus expectations of 4.1%. This triggered the Sam’s Rule recession indicator, and interest rates immediately fell sharply as investors purchased “recession insurance” through safe-haven Treasury bonds. At the next FOMC meeting in September, the Federal Reserve responded affirmatively with actions and words, cutting interest rates by 50 basis points, and Chairman Powell announced clear support for the economy, “Overall, the economic situation is solid. We intend to use our tools to keep it there”. The Fed’s strong reaction led to the easing of “recession insurance” deals, triggering a rise in interest rates.
Chairman Powell stated at the November Federal Open Market Committee (FOMC) that the presidential election will have no impact on our monetary policy decisions and therefore the upward trend in interest rates will stall over the next four weeks. Animal Spirits has been in a growth spurt all month, led by double-digit returns in small-cap stocks. Market breadth was strong, with all 11 large-cap and small-cap stocks ending higher, with the S&P 500 (+5.9%) and Russell 2000 (+11%) both posting their best monthly performances of 2024.
At the December Federal Open Market Committee (FOMC), the Fed’s reaction function shifted in a hawkish direction, with Chairman Powell emphasizing that the relationship between inflation and labor relative to previous meetings’ concerns about weak economic data (i.e., labor) Greater balance should be maintained. Powell also noted that some members are beginning to consider the economic impact (i.e. inflation) of the incoming Trump administration. While the Fed’s quarterly SEP forecast (December) includes marginal changes in GDP and unemployment in 2025, the outlook for inflation and the federal funds rate is more stark. Core PCE rose 0.3% to 2.5% in 2025, the largest quarterly change in more than a year, while FFR rose 0.5% to 3.9% from 3.4%, implying just four more rate cuts in 2025 than the previous SEP forecast 25 basis points.
The stock market responded accordingly, falling sharply in December, with all 11 small-cap and 8 of 11 large-cap sectors posting losses. One of the few strong forces once again came from the Seven Major Index, which rose 6.3% in December.
Looking to the future
FactSet data shows that third-quarter profits of S&P 500 companies increased by 5.9% annually, marking the fifth consecutive year of growth.th Profit growth has been positive for a consecutive quarter. In the fourth quarter, S&P 500 earnings per share are expected to grow 11.9%, which would be the best quarter since the fourth quarter of 2021. 5.1%, while earnings per share in 2025 are expected to grow by 9.4% and revenue by 5.1%.
Despite strong corporate profits, with strategists forecasting GDP growth of 2.1% in 2025 compared with 2.7% in 2024, markets will have to contend with increasing uncertainties in 2025 that could lead to increased volatility. Forecasters vary widely on the impact of the incoming Trump administration’s policies on tariffs, immigration, deregulation, tax cuts, geopolitics and fiscal spending. The Fed’s recent shift toward slowing the pace of interest rate cuts is a precursor to new administration policy. Despite the 100 basis point cut, interest rates are still rising, with the average 30-year fixed mortgage rate above 7%. Just last week, the U.S. dollar index (DXY) broke to a new two-year high, which is a growing headwind for foreign companies and businesses. If both interest rates and the U.S. dollar remain at these levels or higher, it could lead to weaker economic activity at home and abroad.
The information contained herein is for informational and educational purposes only, and nothing contained herein should be construed as investment advice representing a specific security or an overall investment strategy. All information contained herein was obtained by Nasdaq from sources believed by Nasdaq to be accurate and reliable. However, all information is provided “as is” without warranty of any kind. It is strongly recommended to seek the advice of a securities professional.
