December 2024 Commentary

The past year marked a pivotal shift for economies and global markets, with central banks beginning to ease interest rates, the U.S. elections signaling major policy shifts, and Generative AI achieving remarkable advances in adoption and development. We hope you enjoyed a joyful holiday season and have started the New Year with renewed optimism. As we look ahead to 2025, the enthusiasm is unmistakable with "Great Expectations" reflecting the excitement surrounding the opportunities on the horizon. A record-breaking equity market in 2024 and the promise of transformative policies have set the stage for a pivotal year ahead. However, with this optimism comes the need for careful navigation as markets adapt to evolving conditions and new challenges.

U.S. equities delivered exceptional returns in 2024, with the S&P 500 gaining over 20% for a second consecutive year. December, however, marked a softer finish, with the index pulling back 2.5%. Gains in Communication Services, Consumer Discretionary, and Technology mitigated deeper losses, while Materials and Energy sectors faced steep declines exceeding 8%. Technology's influence surged to 32.5% of the S&P 500, its highest level since the dot-com bubble, while the largest 10 companies now account for a record 39% of the index. The postelection rally in Energy and Financials faded into December, echoing patterns observed in 2016, as sector leadership begins to shift in anticipation of the new administration’s priorities.

While the optimism surrounding 2024’s remarkable market performance sets a hopeful tone for 2025, the underlying economic data paints a more nuanced picture. Key indicators from the labor market, inflation, and the Federal Reserve's monetary policy decisions reveal both progress and challenges as we transition into the new year. These metrics not only help explain the dynamics behind December’s market performance but also offer valuable insights into the opportunities and risks that lie ahead. Let’s take a closer look at the trends shaping the economic landscape.

The labor market showed resilience in December, rebounding after disruptions from storms and strikes. The U.S. added 227,000 jobs in November, surpassing expectations and bolstered by the return of striking Boeing workers. Revisions to previous months added 56,000 jobs, reinforcing the strength of the employment landscape. However, the unemployment rate ticked up slightly to 4.2%, and wage growth remained steady at 4% year-over-year, signaling moderation in labor market momentum as the economy moves toward a slower, but stable, trajectory.

Inflation, however, proved more stubborn. The Consumer Price Index rose 2.7% year-over-year in November, with core goods showing their fastest monthly increase in 18 months. Vehicle prices, driven higher by hurricane-related replacements, contributed significantly to the reversal of a yearlong trend of falling goods prices. Core inflation held steady at 3.3%, underscoring the Federal Reserve’s challenge in achieving its 2% target. Meanwhile, PCE inflation, the Fed’s preferred gauge, rose by 0.1% in November, to 2.4% year-over-year, adding complexity to the Fed’s path forward on interest rate cuts.

The Federal Reserve capped the year with a quarter-point rate cut, lowering the benchmark rate to 4.25–4.5%, but signaled a more cautious approach to further easing in 2025. Chairman Powell’s hawkish tone sparked a sell-off in equities, as policymakers revised inflation forecasts upward and tempered their expectations for rate reductions next year. Despite these concerns, consumer sentiment remained buoyant. The University of Michigan’s index rose to 74.0 in December, its highest level since April, driven by improving buying conditions and robust holiday optimism. This resilience reflects a critical pillar of support for the economy heading into 2025.

The Conference Board Leading Economic Index® (LEI) offered a positive signal in November, rising 0.3%—its first increase since February 2022, though it remains down 1.6% over the past six months. Gains in building permits, equities, and manufacturing hours point to pockets of strength, but uneven recovery in the housing market and regional disparities highlight underlying headwinds. The Conference Board forecasts GDP growth of 2.7% in 2024, with a slowdown to 2.0% expected in 2025.

Looking forward, the new administration’s focus on deregulation, tax cuts, and industrial revitalization could provide tailwinds for capital investment and business confidence. However, questions surrounding elevated valuations in technology, geopolitical tensions with China, and uncertainties in energy policy remain critical factors shaping the market landscape. The dominance of the "MAG 7" and the rapid integration of AI will likely continue to define equity markets, but sustainability and profitability concerns around hyperscaler spending warrant scrutiny. The evolving policy environment and global dynamics will require investors to adapt to both opportunities and risks.

As we enter 2025, optimism fueled by strong economic resilience and the new administration’s policy initiatives sets a constructive tone for markets. Opportunities may emerge in industrials and technology, sectors poised to benefit from policy priorities, while the robust consumer sentiment provides support for discretionary spending. However, persistent inflationary pressures and a more measured Federal Reserve stance suggest the importance of a cautious and diversified investment approach. Non-cyclical sectors, international exposure, and a focus on quality assets can provide resilience in navigating potential volatility.

The year ahead will be defined by transformative themes such as AI integration, shifting energy policies, and geopolitical challenges. While these developments offer significant growth potential, maintaining a balanced and strategic outlook will be essential. Wishing you a prosperous and rewarding 2025.