Q4’24: Another Up Year in 2025?

For the second year in a row, the stock market had double digit returns: the S&P 500, the standard benchmark for the stock market, was up +24% for the year vs. +24.2% the prior year, and Nasdaq had another stellar year, up +30.8% vs. +43.4% in 2023.[i]

Mega cap tech stocks outperformed yet again with Nvidia, a core holding for our clients, up 171%[ii] on the year, as earnings growth continued to be revised higher. Inflation data continued to decline, convincing investors the Fed would soon start cutting interest rates, which indeed they did. After a 14-month hiatus[iii] from the aggressive rate increases of 2022, the Fed cut rates three times starting in September for a full percentage point in total.

Company earnings were up five quarters in a row in ‘24[iv] over ’23 with near record profit margins of 12% vs. the ten-year average of 10.8%; Q2’25 estimates are even higher at 13.1%.[v] Earnings forecasts range from 10-15% for 2025, and economic data continues to be reassuring: third quarter GDP growth was confirmed at 3.1% vs. 2.8% expected,[vi] and GDP estimates for 2025 are in the 2.4% range.[vii]

A record-breaking $1 trillion flooded into ETFs in 2024,[viii] up 30%, as economic growth continued to surprise on the upside: full employment at 4.2%, wage growth outstripping inflation, solid balance sheets for both consumers and companies. Wealth increased by 37% from 2019 through 2022, according to the Federal Reserve’s latest Survey of Consumer Finances. That marked one of the fastest accumulations of wealth in decades, and it showed as consumers kept spending and look set to continue doing so: consumer confidence has hit its highest level in three years.[ix]

Continued improvements in productivity, powered by digitization, automation, robotics, and cloud computing plus the still unfolding impact of Ai efficiency improvements, means growth without inflation.

While the downward trend in inflation has stalled in recent months at 2.8% (core PCE, the Fed’s preferred inflation gauge), above the Fed’s target of 2%, it is unlikely to pick up meaningfully given the ending of the severe supply disruptions of the covid shutdown that upended both the labor and consumer goods markets.

With two years in a row of 20+% stock market returns and no serious correction (-10% or more) since ’23, we are unlikely to see returns of that magnitude in ’25. That plus the uncertainty of policy direction under a new administration could mean more volatility than last year with its 50 record highs in the S&P 500. Geopolitical events, though often unsettling, seldom have long-lasting effects on the stock market.

The wild cards are what happens with the new administration’s policies: will tax cuts and deregulation in key industries – banking and energy – be pro-growth enough to offset the potentially inflationary and negative growth consequences of higher tariffs and mass deportations? (E.g. About 20% of construction workers are illegals,[x] yet there is still a shortage of some 500,000 workers in that industry. Agriculture has a similar dependence.)

Size and timing of these policy initiatives are important to gauge and may keep cautious investors on the sidelines awaiting more clarity.

But the economy looks strong, corporate earnings expectations are solid, and that is what moves stocks higher.

We expect good stock-picking to continue to be rewarding and believe we are well-positioned for what should be an up year in the stock market. Fourth quarter earnings reports start mid-January with the big banks likely reaffirming a healthy economic outlook.

As the CIO of BD8 Capital Partners, I appear on CNBC weekly to talk about stocks and the stock market, as well as on other news outlets, and we post frequently on “X” (Twitter), LinkedIn and our BD8 Capital Partners Facebook page so you can follow our market commentary. Our website also has updates and information about the firm (https://bd8cap.com/).

As always, we at BD8 Capital Partners continue to focus on your long-term financial future and planning needs, while managing your investments to help meet your financial goals.

Please never hesitate to contact us with any questions or concerns at any time. If you have friends or family who would like a second opinion on their investments and/or financial plans, please also feel free to recommend us. We love helping your friends and family!

—————————————————————-

[i] https://www.axios.com/2024/12/31/stock-market-2024-gains-sp500-nasdaq

[ii] https://www.nasdaq.com/articles/nvidia-skyrockets-171-2024-will-stock-outshine-again-2025#:~:text=NVIDIA%20Corporation%20NVDA%20has%20delivered%20a%20jaw-dropping%20171.2%25,position%20as%20a%20trailblazer%20in%20the%20semiconductor%20industry.

[iii] https://www.bankrate.com/banking/federal-reserve/history-of-federal-funds-rate/

[iv] https://insight.factset.com/sp-500-earnings-season-update-november-1-2024

[v] https://insight.factset.com/sp-500-reporting-net-profit-margin-of-at-least-12-for-the-2nd-straight-quarter

[vi] https://www.cnbc.com/2024/10/30/us-gdp-q3-2024.html

[vii] https://www.atlantafed.org/cqer/research/gdpnow

[viii] (https://www.wsj.com/finance/investing/investing-exchange-traded-funds-2024-4e047e8b?mod=djemwhatsnews

[ix] https://www.barrons.com/articles/holiday-spending-retail-stocks-293d44a0?mod=djem_b_Weekly%20Barrons%20feed%20for%20last%2024%20hours%E2%80%99

[x] https://limos.engin.umich.edu/deitabase/2024/05/28/undocumented-construction-workers-us/