We entered 2024 on a high note, with the S&P 500 at all-time highs and the Fed holding rates steady for the preceding five months bringing some calm to the fixed income market. Despite strong performance and high expectations, corporate earnings continued to grow, albeit driven by only a handful of large-cap technology companies. Meanwhile inflation continued to moderate, and unemployment remained near multi-decade lows.
Following a headline-grabbing presidential election and markets reaching new highs over 50 times this year, many investors are wondering what’s next in 2025 after back-to-back years of above average equity growth. This is not a unique question that emerges this time of year, but the simple fact is that forecasting market returns for any given year is a challenging exercise. As an Investment Committee, we need a roadmap for the year ahead, and most importantly want to provide insights for those whom we are financial stewards.
As a starting point, the economy usually grows two to three percent and stocks generally go up. Therefore, putting specific numbers on any forecast can be relatively easy using earnings or valuation projections versus historic averages or performance under certain environments or scenarios. In the end, however, what will actually emerge in the upcoming year may be in the nuanced realities that unfold.
As we enter 2025, here is how the markets could play out:
Equities
- A big part of the entire stock market story is tech, and tech earnings specifically. There’s a lot of concern about the outsized role that the tech mega-caps play in the broad index. However, the basic story behind their dominance is the huge earnings growth numbers that they’ve put up year, after year, after year. Typically, we would expect that giant companies see earnings slow down as they mature, but Big Tech’s ability to grow from large numbers has been extraordinary.
- For 2024, the Magnificent Seven (which includes Apple, Amazon, Microsoft, Tesla, Google, NVIDIA, and Meta) will likely post earnings growth around 33%. The remaining 493 companies will likely grow earnings around 3% for the year.
- For 2025, the consensus anticipates the Magnificent Seven earnings growth rate around 18% versus 12% for the broader market. Going from a 30% gap to a 6% gap is a notable shift, and the early forecasts for 2026 indicate that’s going to tighten even further to about 4%. Relative earnings growth could be a good explanation of why we may see a narrowing performance difference within the S&P 500.
- Putting some numbers around that historic performance, the Magnificent Seven outpaced the remainder of the S&P 500 by 63% in 2023. In 2024, that Magnificent Seven outperformance has been about 20%. So, while the largest cap stocks may continue to outperform, it may be by a much, much smaller margin than the last couple of years if valuations were to remain unchanged. This would imply the case for more diversified stock portfolios, not just in market cap, but geographically as well.
Fixed Income
- The story remains similar to the end of last year, with rates likely plateaued and any further cuts likely to benefit bonds. Fixed-income investors are entering 2025 with a strong foundation. With yields at attractive levels and the Fed in a supportive, rate-cutting cycle, bonds are well-positioned to generate healthy returns.
- Bonds are also regaining their critical role as portfolio diversifiers, with performance becoming less correlated to stocks over the last year. This should allow bonds to resume their important role as shock absorbers in a portfolio that includes stocks and credit risk.
Economy Dynamics
- Common concerns listed on nearly every forecast for 2025: geopolitical risks, inflation, and unemployment, with recession risks surprisingly drifting away after dominating expectations for the last two years. Geopolitical impacts are potentially the most unpredictable. While inflation and unemployment tend to move slower, and the current trend portrays a stable, albeit not stellar, environment.
- The new administration has brought attention to potential policy changes that could impact the economy and markets over a period of time. Stocks have broadly rallied since the election, continuing the multi-year trend of strong performance. Some of the movement could be naturally chalked up to Trump policies (lower taxes, lighter-touch regulation) while longer-term concerns regarding potential tariffs or deportations and what that means for future inflation has caused increased uncertainty in the bond market and in corporate spending and investing activity. In November, Fed Chair Jerome Powell stated, “The economy is not sending any signals that we need to be in a hurry to lower rates.” While Powell has been clear there’s no linear path to 2% inflation, policy uncertainty will be a consistent theme for the upcoming year and is likely contributing to the Fed’s more inertial attitude toward lowering rates.
While the 12-month market outlook may be top of mind, understanding the impacts on long-term performance and the benefits of diversification to dampen volatility are valuable. Diversification to support an investor’s liquidity needs along the way may soothe concerns of long-term investors, too.
Below we highlight the hypothetical performance of simplified investment strategies across the various target allocations. This is measured by an index’s historic performance to illustrate past performance and volatility. As asset class performance ebbs and flows, the data illustrates the benefits of long-term diversification across stocks and bonds that become amplified over time as historic portfolio returns level out.
At the start of 2024, we positioned our portfolio strategies with an overweight allocation to Equities and an underweight allocation to Fixed Income, specifically with increased direct S&P 500 exposure. So far this year, the S&P 500 has outpaced broader Fixed Income by ~23% YTD. This overweight position is still in place as we enter 2025. A strong 2023 and 2024 naturally leads to some concern going forward, but we believe we are well positioned for potential weakness while still having ample exposure in the event of continued strength.
All in all, current indicators paint a healthy picture for the year ahead, but the last 4+ years have reminded investors of how quickly things can change. The diversification to have broader investment exposures while not relying too much on any one asset class could provide a needed, steadying influence amidst periods of heightened volatility. Staying comfortable in the uncomfortable while recognizing real challenges that exist, and remaining flexible to adjust as needed is as important as ever. As your financial advisory team, we are here to help navigate your portfolio through whatever the market brings and will stay focused on a long-term view to help keep you on the right path in achieving your goals.
As always, please reach out to your JNBA Advisory Team with any questions.
Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from JNBA Financial Advisors, LLC.
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