Market Commentary: Q4 2024

GeoWealth's Market Observations

INSIGHTS FROM OUR INVESTMENT SOLUTIONS TEAM

Q4 2024's Key Themes:

• U.S. equity markets posted returns exceeding 20% for the second consecutive year, marking the first such streak since the 1990s, driven by strong earnings growth, resilient consumer spending, and optimism around pro-growth policy expectations.
• The Fed’s December meeting triggered the worst market selloff since the pandemic, with Chairman Powell signaling a shift toward a neutral policy stance by projecting just two additional rate cuts for 2025, reminiscent of steep losses on prior Fed decision days, such as March 2020 (-12%) and September 2001 (-5%). 
• Gold ended the year up 27%, slightly outperforming the S&P 500, as its safe-haven appeal was bolstered by persistent geopolitical uncertainties, central bank purchases, and investor hedging against inflationary pressures.

U.S. Equities Surge in 2024 Amid Earnings Strength and Fed Optimism

The fourth quarter of 2024 saw U.S. equities cap off a robust year, with the S&P 500 posting strong gains as investor sentiment surged on easing inflation and progress in the Federal Reserve’s rate-cutting cycle. Earnings growth remained a key driver, with sectors such as technology and consumer discretionary outperforming, buoyed by continued strength in AI-driven innovations and resilient consumer spending. Despite earlier concerns about elevated valuations, double-digit earnings growth helped justify price levels, pushing the index higher into year-end. In particular, large-cap growth stocks led the charge, reflecting investors’ confidence in productivity-enhancing sectors.

However, the rally was not without its challenges. Concerns about geopolitical risks, including U.S.-China trade tensions and heightened political uncertainty following the presidential election, intermittently tempered market enthusiasm. Additionally, market breadth deteriorated at year-end, with the number of declining stocks outpacing the number of advancing stocks across the S&P Large-, Mid-, and Small-cap indexes. The number of S&P 500 companies above their 200-day moving average fell back to levels last seen in August 2024.

Despite the pullback in December, institutional money continues to rotate out of cash allocations to equities. In the most recent BofA Global Fund Manager report, equity allocations have reached extreme levels last seen in 2008, while cash allocations have reached a three-year low of 3.9%.

Equity returns across market cap and style boxes reflected a resurgence in risk-on sentiment, particularly leading into and following the presidential election. Large-cap growth stocks outperformed as investors rotated back into high-growth areas of the market, driven by optimism surrounding pro-growth policy expectations and an improving economic outlook. 

Sector performance was uneven, with only three of the 11 S&P 500 sectors finishing the quarter in positive territory. Consumer Discretionary led the gains, rising 12.1%, buoyed by strength in retail and e-commerce stocks as consumer spending exceeded expectations. The Communications sector followed, up 7.3%, driven by strong performance in streaming, media, and select telecommunications firms. Meanwhile, the Technology sector posted a 3.1% gain, reflecting robust earnings growth and continued investor confidence in the sector’s secular tailwinds, including AI innovation and cloud adoption. 

Gold delivered its strongest performance since 2010, rising 27% in 2024. The gains were fueled by U.S. monetary easing, persistent geopolitical risks, and robust central bank purchases. The precious metal has become favored among investors amid heightened uncertainty surrounding 2025 monetary policy, potential tariff disputes, and China’s efforts to stimulate economic growth.

What makes this rally particularly noteworthy is its resilience in the face of traditionally adverse conditions. Rising Treasury yields and a strengthening U.S. dollar—a combination typically seen as headwinds for gold—have coincided with its climb, underscoring its role as a safe-haven asset in times of uncertainty.

Fixed Income Faces Turbulence Amid Fed Caution and Political Uncertainty

The Federal Reserve’s December meeting delivered a sharp jolt to fixed-income markets, marking the most significant selloff since the pandemic. Chairman Powell’s announcement of a cautious rate-cutting trajectory tempered investor optimism, as the central bank signaled just two additional cuts for 2025. This restrained approach reflects ongoing concerns over inflation, which saw 2025 forecasts rise from 2.1% to 2.5%. Meanwhile, the labor market remained resilient, with unemployment at 4.2%, complicating the Fed's mandate and limiting the scope for aggressive monetary easing.

Adding to market uncertainty, Donald Trump's return to the White House has introduced geopolitical and economic risks tied to potential tariff adjustments, immigration reform, and protectionist policies. These factors have pushed term premiums higher, creating additional headwinds for risk assets.

Fixed income sectors struggled to close the year, with most sectors posting losses for December and the fourth quarter. Notable exceptions included floating-rate treasuries, treasury bills, and U.S. corporate high-yield bonds, which outperformed as investors sought opportunities in pockets of resilience.

Global Growth on Shaky Ground: Eurozone, UK, and China Face Economic Crosswinds

The eurozone economy is projected to grow marginally in 2025, with forecasts of 1.0% growth compared to 0.8% in 2024. However, longer-term projections have been tempered, with 2026 growth estimates revised to 1.2% from 1.4%. This muted outlook reflects persistent challenges in key manufacturing economies, particularly Germany and France, where Manufacturing PMIs remain entrenched in contractionary territory. 

Despite this, the European Central Bank (ECB) remains cautiously optimistic, highlighting potential tailwinds from rising household incomes and moderating inflation, which is expected to trend toward the 2% target. ECB Chief Economist Philip Lane remarked, “There’s solid reason to believe there will be an improvement in the economy next year and the year after… even though consumption is now rising, there may be a little bit of delay in that, because in a world of uncertainty, maybe some people are holding back on consumption decisions.”

The return of Donald Trump to the White House introduces new geopolitical and economic uncertainties, adding complexity to the euro zone's outlook. Potential tariff adjustments could weigh on the region's trade flows. At the same time, pro-growth policies under the new U.S. administration and a slower rate-cutting trajectory by the Federal Reserve may exert downward pressure on the euro. This currency dynamic could create additional headwinds for European exports, further complicating the economic recovery.

In the UK, economic data painted a mixed picture. Monthly GDP declined for the second consecutive month, with the latest reading showing a 0.1% contraction in October. This marks the first back-to-back monthly decline since the onset of the COVID-19 pandemic in early 2020. While some business surveys hinted at optimism, many firms are adopting a wait-and-see approach ahead of the Labour Party’s budget proposals. Economists project that planned public investment and spending increases could accelerate growth in 2025, but business groups have expressed concerns over the potential drag from rising social security taxes.

In China, leadership has pledged to adopt a more accommodative monetary policy and implement targeted stimulus measures as the country braces for potential economic pressures under President-elect Trump’s administration. President Xi Jinping's Politburo has signaled an era of more aggressive rate cuts in a marked shift from the “prudent” strategy that has guided policy for the past 14 years. Morgan Stanley economist Robin Xing wrote, “The Politburo’s December meeting sent the most aggressive stimulus tone in a decade… while the tone is very positive, implementation remains uncertain.”

Policy priorities are now focused on bolstering domestic consumption, stabilizing the stock market, and supporting the property sector. However, this pivot comes with significant challenges. While Beijing has drawn comparisons to its use of monetary stimulus during the Global Financial Crisis, officials remain adamant that the scale of that intervention will not be repeated. Despite recent rate cuts, efforts to spur spending have faced resistance, with household and corporate sentiment remaining subdued.

The broader economic backdrop has placed additional strain on corporate earnings, as slowing growth erodes profitability and prompts businesses to scale back investments and wages. This delicate balancing act underscores the uncertainty surrounding China’s near-term trajectory, with policy effectiveness hinging on the government’s ability to translate stimulus measures into meaningful economic momentum.

Equity market returns across developed economies experienced declines in the year's final month and remained down for the quarter as growth remained subdued. 

Our 2025 Outlook

As we enter 2025, the investment landscape is defined by a shifting macroeconomic backdrop marked by monetary easing, geopolitical complexities, and structural technological advancements. These dynamics present both opportunities and challenges, requiring a strategic approach grounded in diversification, flexibility, and a focus on quality.

• Balancing Growth and Stability: Historical periods of monetary easing, such as post-2008, have demonstrated the importance of balancing growth and defensive strategies. U.S. equities are poised to benefit from strong earnings growth, particularly in technology and consumer discretionary sectors.

• Diversification Across Markets: Lessons from past recoveries, including the early 2010s in Europe, highlight the value of geographic and sectoral diversification. With international equities offering relative value, particularly in Europe and select emerging markets, opportunities are emerging as monetary and fiscal policies turn supportive. Additionally, transformative themes like artificial intelligence and energy transition continue to shape the next economic cycle, providing growth potential across sectors.

Entering 2025, a well-constructed portfolio that balances these dynamics could position investors to capture growth while effectively navigating uncertainty.

NOTE:

GeoWealth's Market Commentary has converted from a monthly cadence to a quarterly cadence. This change allows us to provide deeper insights into market trends and developments.

Sources:

1. Data from Morningstar. Returns over one year are annualized.  

DISCLOSURES:

Past performance is no guarantee of future returns.

The graphs and charts in this commentary are for illustrative purposes only and not indicative of any actual investment. Index returns do not reflect any fees, expenses, or sales charges. Stocks are not guaranteed and have been more volatile than other asset classes. Historical returns were the result of certain market factors and events which may not be repeated in the future. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgement in determining whether investments are appropriate for clients.

The information here is not intended to constitute an investment recommendation or advice.

Returns are based on the S&P 500 Total Return Index, an unmanaged, capitalization-weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries. Indices do not include fees or operating expenses and are not available for actual investment. The hypothetical performance calculations are shown for illustrative purposes only and are not meant to be representative of actual results while investing over the time periods shown. The hypothetical performance calculations for the respective strategies are shown gross of fees. If fees were included returns would be lower. Hypothetical performance returns reflect the reinvestment of all dividends. The hypothetical performance results have certain inherent limitations. Unlike an actual performance record, they do not reflect actual trading, liquidity constraints, fees and other costs. Also, since the trades have not actually been executed, the results may have under- or overcompensated for the impact of certain market factors such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. Returns will fluctuate and an investment upon redemption may be worth more or less than its original value. Past performance is not indicative of future returns. An individual cannot invest directly in an index.

This material has been prepared for information and educational purposes and should not be construed as a solicitation for the purchase or sell of any investment. The content is developed from sources believed to be reliable. This information is not intended to be investment, legal or tax advice. Investing involves risk, including the loss of principal. No investment strategy can guarantee a profit or protect against loss in a period of declining values.