'24 A Good Investment Year
We’re coming off another great year for investments.
What drove US stocks in 2024? We credit three main drivers:
1) Above-expected economic growth. After relatively slow 1st Quarter, the US economy is estimated to have averaged 2.8% growth in the final three quarters of 2024, about .7% above year-end 2023 projections.
2) Continued enthusiasm for Artificial Intelligence. According to Dow Jones Market Data the Magnificent 7 stocks average 65% gains for the year.
3) The Federal Reserve cut interest rates aggressively starting in September. The central bank lowered the fed funds rate a total of one percent over three Fall meetings to support employment and economic growth.
We head into 2025 feeling good about our analysis from just 12 months ago. If you remember, in January 2024 we doubled down on our soft-landing argument while many were holding onto their recession predictions from 2023. While we undoubtedly witnessed some slowing in 1A ’24, it’s hard to argue that the US economy was not stronger than expected in 2024.
Most of our research continues to point to the soft economic landing (or even no landing) scenario. In other words, we see the risk of recession as very low. This is important because a significant economic slowing is the biggest risk to stock prices. As long as GDP stays in the 2%-3% range, stock investors should be able endure the increased volatility that is likely this coming year.
At current valuations, US stocks seem poised for modest gains ahead. But there is a path for additional significant gains…gains not driven by increased valuations. If the economy remains as strong as it has been, corporate earnings could drive stock prices up by double digits this year without further stretching valuations.
The stock rally that continued in 2024 featured progress on some of the themes from 2023: a Fed pivot and implementation of rate cuts, gains in AI, and most importantly a solid US overall economy. Can progress on these then continue in 2025? And will new policies and laws, from the Trump Administration and Congress respectively, help or hurt that progress?
Uncertainty will almost certainly cause increased volatility in the coming years. We got a little taste of what’s to come in December. Remember, the Fed did cut its rate last month. But market participants focused on their forward guidance, which was disappointing but not substantially negative. The key for investors in 2025 will be maintaining their resolve if the markets act up amid negative new cycles.
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