In the fourth quarter of 2024, U.S. equities continued to appreciate, although at a slower pace relative to gains delivered earlier in the year. All told, the S&P 500 finished the year with a 25.0% gain, building on the 24.2% rise in 2023, which marked the best back-to-back yearly performance for the index since 1997 and 1998. These strong gains were propelled by an economy that grew faster than anticipated versus more subdued expectations coming into the year, moderating inflation, an acceleration in corporate earnings growth, and the Federal Reserve’s policy pivot to interest rate cuts. While there were moments of improved market breadth throughout 2024, large-cap growth companies—particularly those monetizing AI-related technologies—continued to lead gains in the fourth quarter, resulting in another year of mega cap concentrated returns. Conversely, U.S. government bonds faced challenges in the fourth quarter. Strong economic growth, slowing disinflation, and a resilient labor market led the Federal Reserve to scale back its 2025 rate-cut forecasts. This resulted in the fifth consecutive year of rising 10-year U.S. Treasury yields.
In addition to Communication Services and Technology, the Financials and Utilities sectors were standout performers in 2024. Financials, especially large banks, performed well as recession fears receded, higher market interest rates supported net interest income, and capital markets activity rebounded strongly. The November election of Donald Trump further boosted the sector, as his incoming administration is expected to scale back bank capital requirements and aggressive antitrust policies which should further boost M&A activity. Meanwhile, Utilities, which often underperform in rising rate environments, benefited from the AI-driven demand for new electricity-generating capacity to power “hyperscale” data centers for AI applications.
The U.S. economy continued to outperform expectations in the fourth quarter, with the Federal Reserve estimating annualized GDP growth of 2.7%. This growth was fueled by robust consumer and government spending. After a slowdown caused by two major hurricanes in September and October, job creation surged in December, bringing the unemployment rate down slightly to 4.1%. Despite rising interest rates and persistent inflation, consumer spending remained resilient, driven largely by higher-income households.
Globally, inflation trends shifted late in the year. After declining for much of 2024, inflation began to tick upward, leading to shifts in investor sentiment and cautionary messaging from central banks in the U.S., Europe and other major economies. In the U.S., annualized consumer price growth fell from 3.4% at the start of the year to 2.4% in October but is forecasted to rise to 2.8% in December. Similarly, PCE inflation is expected to show a modest increase. Bond markets, already pricing in expectations of stronger GDP growth and slowing disinflation, saw further turbulence after the Federal Reserve raised its inflation forecasts in December and scaled back expectations for 2025 rate cuts. This resulted in a sharp rise in Treasury yields in the final weeks of the year, a trend that has extended into early 2025. Markets are now pricing in approximately 25 basis points of rate cuts this year, compared to the Fed’s forecast of 50 basis points.
International markets delivered an 18.0% gain for 2024 but struggled in the fourth quarter. However, the strong U.S. dollar—which appreciated against all major currencies due to robust growth and rising rate differentials—significantly reduced returns for dollar-based investors, cutting gains by nearly two-thirds. Asian markets, led by Japan, Singapore, and China, were the primary drivers of international performance. China’s market surged in the third quarter following government stimulus measures aimed at reviving its economy, but it cooled considerably in the fourth quarter due to vague policy specifics and weak economic indicators, signaling another challenging year ahead.
With the Federal Reserve lowering interest rates, high-quality public fixed income assets appear increasingly attractive. Starting yields—historically strong indicators of forward returns—remain at 15-year highs, offering compelling income potential and downside protection if inflation rises. High-quality bonds typically exhibit lower volatility than equities, providing a more stable option for investors in uncertain economic conditions. While cash yields were attractive over the past two years, their fleeting nature makes core bonds more favorable for long-term income. Since the Fed began its rate-cutting cycle in September, the outlook for cash yields has deteriorated relative to bonds. While some upward revisions to rate forecasts are possible, the Fed’s current trajectory suggests gradually declining cash rates. As rate cuts progress, bond investors stand to benefit from capital appreciation and higher income than money market funds can offer.
Within fixed income, we remain selective, focusing on higher-quality, more liquid, and resilient investments. Defensive sectors and large, systemically important banks with strong capital positions continue to offer value. Government-guaranteed mortgage securities (Agency MBS) are particularly attractive, as their spreads over Treasuries remain near historical highs, making them a liquid alternative to corporate credit. As always, fixed income portfolio duration should align with client cash flow needs with a neutral benchmark anchoring.
The conditions for positive equity market performance in 2025 remain intact, driven by strong domestic economic growth, a robust labor market, and rising corporate earnings. However, caution is warranted given historically high valuations, market concentration, and widespread bullish sentiment. Uncertainty surrounding key policies of the incoming administration—such as tariffs, unfunded tax cuts, and immigration reforms—could significantly impact economic growth, inflation, and interest rates.
Our global equity portfolio remains overweight large-cap U.S. stocks relative to foreign equities. While we modestly increased international exposure in mid-2024, we have since reduced positions due to the continued strength of the U.S. dollar, which dampens returns for dollar-based investors. We continue to favor high-quality companies with stable growth prospects and have increased exposure to the Financials sector. At the same time, we’ve reduced allocations to highly cyclical and interest rate-sensitive sectors like Materials and REITs. We remain committed to companies positioned for capital investment and long-term growth. While the U.S. economy and markets remain well-positioned for 2025, investors should prepare for heightened uncertainty and remain focused on quality, diversification, and resilience across both equity and fixed income portfolios.
Author:
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Bruce Schoenfeld Principal Investment Analyst First American Trust |
Bruce is the Principal Investment Analyst responsible for investment research coverage of various asset classes and equity industry sectors. Bruce has more than 20 years of experience as an equity analyst and portfolio manager. He joined First American from 3P Associates, LLC, an investment and strategic management consulting firm he founded. He previously served as Director of Research at BlueStar Global Investors and as an analyst and portfolio manager focused on emerging markets for Delaware Investments, Artha Capital and Caisse de depot et placement du Quebec, Canada’s second largest pension fund.
Co-Authors: |
Jason Nerio SVP, Director of Investment Research & Strategy First American Trust |
Jason Nerio is the Director of Investment Research and Strategy at First American Trust. Mr. Nerio has more than 20 years of investment research experience. He is responsible for formulating investment strategy and serves as a leading member of the investment committee which monitors and manages the firm’s allocation strategies for over $1 billion in client assets.
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Scott Dudgeon, CFA Director, Equity Research First American Trust |
Scott Dudgeon is the Director of Equity Research at First American Trust. Mr. Dudgeon is a Chartered Financial Analyst (CFA) and has more than 25 years of investment research experience. He also serves as a leading member of the investment committee and has a proven track record for outperforming the markets for our clients. He has been with The First American Family of Companies for 16+ years.
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