U.S. stock markets had a second consecutive year of strong gains in 2024 with the S&P 500 and Dow Jones Industrial Average finishing up 25.02% and 14.99% respectively. Strong economic growth, moderating inflation, and improving labor productivity were key factors supporting market strength. Throughout 2024 market valuations climbed to levels last seen during 2020-2021 when the onset of the COVID-19 pandemic caused an abrupt disruption to businesses around the globe, effectively causing an earnings shock that drove up valuations for a time. Today, a forward market P/E of 22x is being driven by investors’ willingness to pay premiums for higher expected growth driven by increasing AI demand and implied productivity gains. The Fed cut its policy rate by one percentage point in the second half of the year and guided to a slower pace of future cuts due to lingering inflation pressures. Investors reacted by pushing yields higher, which may present a headwind for stocks in 2025. With market valuations elevated and potential interest rate headwinds, investors should be prepared to see more modest returns compared to those of 2023 & 2024.
With the new year comes a new administration in the White House. We will closely watch key issues unfold in 2025 as we expect impacts will vary widely by company and industry. Trump’s administration is expected to tighten border security and take a more aggressive stance on immigration. This could have adverse effects on U.S. population growth and labor supply, while increasing wages. A new FTC chair is likely to be less aggressive on anti-trust enforcement, boosting mergers & acquisitions activity. The proposed Department of Government Efficiency has a stated mission to reduce the deficit. In order to make significant progress without raising taxes, large categories such as healthcare and defense would need to see spending cuts. It remains to be seen what policy changes will be implemented. As always, we will diligently follow developments and thank you for another year of trust and confidence!