As we reflect on 2024, it’s clear that this year was shaped by a mix of economic, market, and global forces. The Federal Reserve’s "higher-for-longer" interest rate policy influenced borrowing and investment decisions, while inflation finally showed signs of easing, sparking cautious optimism. The rapid evolution of artificial intelligence (AI) kept the technology sector at the forefront, driving innovation and reshaping industries. Meanwhile, the presidential election and ongoing geopolitical tensions added layers of uncertainty, highlighting the importance of staying informed and adaptable.
As we look ahead to 2025, thoughtful planning and a diversified approach will be essential for navigating the complexities of the coming year.
Interest Rates: "Higher for Longer"
The Federal Reserve’s (FOMC) commitment to keeping interest rates elevated remained a dominant theme. This approach aimed to solidify progress in controlling inflation but had wide-ranging effects across the economy. High rates dampened borrowing and spending, creating challenges for interest-sensitive sectors like housing and real estate. At the same time, savers and fixed-income investors benefited from attractive yields, making fixed income more compelling than it has been in more than a decade. Then September rolled along, and the FOMC implemented their first rate cut in this cycle, offering the first step of relief towards accommodative monetary policy. The FOMC then outlined its path to move interest rates lower and back to their 2.5% target over the next few years. After lowering rates 1% in 2024, the most recent statements from the December meeting are forecasting a slower pace for rate cuts ahead.
The chart below highlights the change in forward expectations between the September and December FOMC meetings. Note that the September meeting was the first time the FOMC cut rates in the current cycle. The yellow line (December forecast) is noticeably higher than the orange (September forecast), highlighting the fact that the FOMC is forecasting a less aggressive posture in lowering rates than they had initially indicated in September.
Inflation Moderation
Inflation cooled significantly throughout 2024, providing some relief to consumers and businesses. While still above pre-pandemic levels, price stability returned to many areas, including energy and goods. However, persistent inflation in services and housing kept economic pressures alive, underscoring the importance of balancing fiscal discipline with spending power. For markets, the easing of inflation helped growth stocks recover, particularly in sectors like technology and consumer discretionary.
As the charts below detail, inflation plateaued for a few months and has displayed a small move higher in the most recent months (the top chart shows inflation measured with CPI while the second shows inflation measured with PCE; an explanation of the two can be found in my 4th quarter 2022 letter). The figure is nowhere near the peak we saw in 2022 but remains elevated and above the 2% target preferred by the FOMC. The FOMC also does not need to rush to lower rates with GDP, the U.S. unemployment rate at 4.2%, and the S&P 500 at +23% for 2024. Chair Powell and the rest of the FOMC now have time on their side, given the present economic and market conditions. The hope is that a restrictive stance will eventually allow inflation to return to its target of 2%.
Election-Year Uncertainty
The 2024 presidential election created heightened volatility in the stock market and the broader economy. Historically, markets react to election cycles, and this year was no different. Investors navigated policy uncertainty around taxes, regulations, and trade priorities as candidates outlined their economic platforms. Despite short-term market swings, the economy remained resilient, reflecting strong consumer confidence and corporate earnings during the second half of the year.
There has been one noticeable disconnect between FOMC-controlled Fed Funds moving lower versus market-controlled 10-year Treasury yields. Despite the FOMC lowering the Fed Funds rate, the 10-year Treasury yield has moved higher. Pundits suggest that future tax cuts, deregulation, stimulative government spending, and tariffs may be a concern for bond investors and the reason behind the contradictory move between Fed Funds and the 10-year. Note the vertical line showing the first rate cut in September and the yield change since that time.
In the proceeding slide, JP Morgan has provided an analysis of the current 2024 federal budget, Congressional Budget Office (CBO) assumptions, and future projections. The critical piece is that these are all assumptions based on suggested policy and economic forecasts, and none of the policies that are forecasted are in place as of this writing. Additionally, these assumptions assume government spending remains the same. The information contained on this slide is as follows from left to right:
- 2024 federal budget total spend and the respective spend categories ($6.8 tn)
- Sources of financing for the budget – currently deficit spending of $1.83 tn, or 27%
- CBO’s baseline assumptions for this year and future years, out to 2034
- Federal deficit & NI outlays – compares present to TCJA extension (chart top right)
- Federal net debt – the federal debt as a percentage of GDP: current vs with TCJA extension
Whether TCJA (Tax Cuts Jobs Act – 2018) is extended, altered, or sunsets remains to be seen. However, the analysis below of additional deficit spending has created the disconnect between Fed Funds rates and bond market rates. If more deficit spending is needed to fund the government, it could drive interest rates up.
The other item of concern is tariffs on imports. Goldman Sachs created the following analysis on tariff rollout and the impact on inflation. If tariffs end up causing inflation, we may return to a situation where the FOMC needs to increase policy rates to tighten conditions again, like what we saw in 2022. The grey line shows the forecasted rate of PCE change without tariffs, and the other two lines forecast a diverging path for inflation if tariffs are enacted. Again, this is based on the proposed policy and not the actual policy today. Time will tell as far as what is eventually enacted, but the summary here is solely to provide context around reasons for market rates, like the 10-year Treasury, rising while the FOMC is cutting.
Technology and the AI Revolution
Artificial intelligence (AI) and automation took center stage in 2024, driving massive growth in the technology sector. Companies leading in AI applications, robotics, and cloud computing experienced significant investor interest. This boom created a broader ripple effect, fueling demand for semiconductors and reshaping industries ranging from healthcare to manufacturing. The "AI arms race" was a key driver of innovation and market optimism, making technology one of the year’s top-performing sectors.
The current measure of this AI boom is largely visible in the performance of the Magnificent 7 stocks (AAPL, AMZN, GOOGL, META, MSFT, NVDA, and TSLA). These stocks were up, on average, 48% in 2024 and accounted for 55% of the total return of the S&P 500. To put it another way, the S&P 500 was +23% for 2024; if you did not own the Magnificent 7 stocks but owned the other 493 stocks, you were only up 10% for 2025.
These seven stocks have continued to show outsized performance compared to the remainder of the S&P 500, and their earnings growth and profit margins have also exceeded the remainder of the index constituents. This has led to greater concentration in the top 10 stocks that comprise the S&P 500. As of December 31st, 2024, the top 10 largest companies in the S&P 500 represent 38.7% of the total index. This means that the other 490 stocks in the S&P 500 are responsible for the remaining 61.3% of the index. As the slide below (top right chart) illustrates, this weight represents an all-time high. As highlighted in my 1st quarter 2024 letter, the top 10 names have seen a significant shift over time, and it will be interesting to see what transpires over the next 10 years as AI matures and other technologies are created. Remember names like AT&T, IBM, GE, Mobil, Shell, etc. These were formidable names in the 80s and 90s and represented the 10 largest names in the S&P 500 at that time.
Geopolitical Events and Global Tensions
Geopolitical events emerged as a critical factor shaping the stock market and economy in 2024, with ripple effects felt across industries and regions. Ongoing conflicts, particularly in Eastern Europe and Asia, created uncertainty in energy markets and disrupted global supply chains, reminding investors of the interconnectedness of today’s economy. The war in Ukraine, for instance, continued to affect energy production and agricultural exports, driving volatility in commodity prices and influencing inflation trends worldwide.
In Asia, tensions over trade and territorial disputes impacted investor confidence. Trade disputes between the U.S. and China escalated throughout the year, leading to shifts in supply chain strategies as companies sought to diversify manufacturing and sourcing to minimize risk. These moves accelerated the “decoupling” trend, with firms increasingly looking to Southeast Asia and India as alternative hubs for production.
Despite these challenges, some geopolitical dynamics offered opportunities for long-term investment. International cooperation on renewable energy projects gained momentum, as countries sought to reduce dependence on fossil fuels and strengthen energy security. These initiatives provided a boost to clean energy sectors, creating opportunities for growth in solar, wind, and battery storage technologies.
For investors, 2024 highlighted the importance of staying alert to the global landscape. Geopolitical tensions can create short-term volatility, but they also drive long-term trends that reshape industries and investment opportunities. Attention to sector-specific risks and opportunities remains a crucial strategy for navigating an increasingly complex world.
2025 Forecast vs Historical Success
The adage that a broken clock is right twice a day is a fitting analogy for stock market forecasts. Just like the clock, even the most off-base predictions occasionally align with reality, but that doesn’t make them reliable. Markets are influenced by countless variables that are nearly impossible to predict with precision. While forecasts can provide insight into trends, they should be treated as one piece of the puzzle, not a definitive guide. Successful investing is less about guessing market movements and more about sticking to a well-thought-out strategy that stands the test of time.
If we were to go back 12 months in time and review the key Wall Street strategist outlooks’ (featured in my 4th Quarter 2023 letter) for the S&P 500 for 2024, you would see the most bullish forecast was for an S&P 500 close of 5,200 at the end of 2024. The most bearish 40% higher than the most bearish. To be fair, these strategists update their view throughout the year, but the takeaway is that trying to predict the market in the short term is extremely difficult and often unreliable, and any forecasts should be taken with a grain of salt.
For year-end 2025, the most bullish view is 7,100, while the most bearish is 6,400. These represent a return for the S&P 500 over the next 12 months between 8% and 17%.
In closing, 2023 and 2024 were back-to-back 20%+ years for the S&P 500, and since 1950, this has only occurred four times (1955, 1996, 1997, 1998). As the table below highlights, this has been a positive omen for the market in the following year as well, with an average return of 19.5% over these four occurrences. Of course, past performance is no guarantee of future performance.
Source: https://www.schaeffersresearch.com/content/analysis/2025/01/02/another-banner-year-for-the-s-p-500
As we reflect on the key themes that shaped 2024—elevated interest rates, easing inflation, the rapid rise of AI, election-year volatility, and impactful geopolitical events, it’s clear that this year underscored the importance of adaptability and a long-term perspective. While challenges remain, these forces also present opportunities for those prepared to navigate them thoughtfully. Whether it’s leveraging innovation, thinking globally, or staying resilient in the face of uncertainty, a disciplined approach is key. As we turn the page to 2025, now is the time to review your financial strategy, ensuring it aligns with your goals and positions you to thrive in the years ahead. Let’s work together to make the most of what’s next.
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