Equity Markets Post Double-Digit Gains for 2024

As we approach the end of 2024, it's clear that equity markets have delivered another year of impressive gains, with many major indexes posting double-digit returns. The S&P 500, for instance, is on track to close up more than 25% for the year, marking one of its strongest annual performances in the last quarter-century. But what drove this remarkable performance, and can these exceptional circumstances persist in the new year?

1. Resilient Economy and Strong Consumer Spending

Despite high interest rates and rising unemployment, the U.S. economy grew by approximately a robust 2.9% in 2024, powered by resilient consumer spending. Even as unemployment increased from 3.7% to 4.2%, overall consumer spending remained strong. This resilience can be attributed to wealth concentration among large corporations and affluent households, which typically hold excess cash and may be less sensitive to interest rate changes. Additionally, immigration contributed to the economy, further bolstering consumer spending.

2. AI Boom and Tech Valuations

Easy financial conditions and AI enthusiasm sent tech valuations soaring in 2024. The financial sector led all industries with a total return of 37.9% YTD, while communication services came in second with a 36.5% YTD return. The utilities sector gained 33.8% YTD, driven by falling interest rates, rising electricity demand, and investments in renewable energy sources. These strong performances were supported by economic recovery, stronger balance sheets, AI advancements, and robust consumer spending.

3. Market Breadth and Active Management

In late Q4 2024, 90% of the stocks in the S&P 1500 index moved above their 50-day moving average, indicating positive market breadth. This signal shows that investors were looking around for shares of companies that had not already gone up a lot, suggesting that active managers may outperform in the coming months. This trend, combined with the strong performance of value stocks, indicates that investors are focusing on fundamentals and careful stock selection.

4. Preparing for a Returning Trump Administration

Elections across the globe took center stage in 2024, with several high-profile votes drawing attention. In November, the focus was on the U.S. election results, which saw a Republican victory and a second term for Donald Trump. From Trump's first term as president, we learned that his policies can be broadly positive for equity markets. Given the decisiveness of the Republican victory, we expect him to potentially enact business-friendly policies, tax reforms, tariffs, and new energy policies. However, it remains to be seen if he can turn these campaign promises into reality as he goes through his second term.

5. History Does Not Repeat, But It Often Rhymes

The market volatility in August 2024 served as a crucial lesson that long-standing trends and seemingly invincible trades which investors may have become somewhat complacent about over the past decade can quickly unravel. The unwinding of the Japanese yen carry trade and the pressure on the US dollar's prolonged bull market highlighted the shifting dynamics that investors must navigate. Similarly, the tech trade, which had been a reliable source of substantial returns, showed signs of vulnerability. As the Federal Reserve cuts rates, we think the dollar's dominance may face significant challenges, potentially signaling a shift in market leadership.

In conclusion, the equity markets' double-digit gains in 2024 can be attributed to a resilient economy, strong consumer spending, AI boom, and positive market breadth. As we look ahead to 2025, investors should remain focused on fundamentals, careful stock selection, and active management. The potential return of a Trump administration and the shifting dynamics of the global economy may present both opportunities and challenges, but history has shown that investors who stay informed and adapt to changing conditions can continue to prosper.