INSIGHTS

January 17, 2025

Market Outlook

Fourth Quarter 2024

Despite a year full of nuance (with the start of the Fed easing cycle and a presidential election), 2024 returns looked a lot like 2023 returns, with momentum and large-cap growth stocks providing leadership.

US equity markets experienced mixed performance in the fourth quarter of 2024. Large stocks produced gains driven by strong earnings in the Technology and Communication Services sectors. The most interest-rate-sensitive sectors, Materials, Utilities, and Real Estate, fell with the rise in long-term interest rates. Small and mid-cap returns were more muted due to concerns over higher rates and geopolitical tensions. A slowdown in global economic growth, particularly in major economies like China and the Eurozone, weighed heavily on international markets. Bond returns were pressured as yields rose across the curve in response to stronger than expected economic growth and sticky inflation. The 10-year Treasury yield ended the fourth quarter near 4.5% and rose further to 4.75% in early January. Commodities experienced a volatile quarter. Oil prices fluctuated, finishing the quarter slightly higher due to supply concerns from geopolitical conflicts in the Middle East. Gold saw increased demand as a safe-haven asset, benefiting from investor uncertainty and rising inflation expectations.

Trump’s victory spurred a re-rating of equities as investors embraced the concept of de-regulation, extended tax cuts for individuals and corporations, and a more pro-business administration.

Reduced macroeconomic risks fueled valuation expansion (P/E multiple) in 2024, driving most stocks higher. Despite a year full of nuance (with the start of the Fed easing cycle and a presidential election), 2024 returns looked a lot like 2023 returns, with momentum and large-cap growth stocks providing leadership. S&P 500 companies grew earnings by around 12%, while smaller corporations (S&P 600) did not grow earnings at all in 2024. Consequently,

larger, growthier areas of the market massively outperformed their smaller, value-oriented counterparts for the year. High rates, lack of pricing power, costly regulation, and cycle-sensitive earnings continue to weigh on small-cap companies. On a cumulative basis, the S&P 500 is up a remarkable 58% over the past two years while investment-grade bonds are up 7% (AGG).

Expectations for Fed cuts fluctuated wildly throughout 2024. In total, the Fed cut rates by 100 basis points (1.00%) in 2024, with the first cut in September of 0.50% being larger than expected. Despite easing policy and a decline in short- term rates, the ten-year Treasury yield rose 69 basis points, reflecting investor expectations for higher growth and inflation. Further, mortgage rates also rose in 2024, with the average 30-year fixed rate ending the year at 7.28%.

The Fed tempered expectations for further rate cuts at their December meeting, indicating inflation is firmly back in focus and that future cuts would require fresh progress. The Fed signaled just two cuts for 2025, down from the four cuts previously signaled. In 2025, economists expect 2% GDP growth with sticky 2.5% inflation and a decrease in the aggressive government spending that has characterized the past two years. Policy uncertainty from both the Fed and the new administration is expected to create economic volatility.

The economy added 2.2 million jobs in 2024, down from 3 million in 2023. Labor growth is clearly slowing, yet the unemployment rate remains muted at 4.1%, supporting consumer spending going forward. Housing remains sluggish and its important multiplier effect absent, a function of ultra-low affordability that is not expected to change substantially this year. The manufacturing economy has struggled, but capital spending is expected to grow going forward due to continued onshoring (bringing manufacturing capacity back to the US) and investment in artificial intelligence.

Given the already high valuations for large US stocks, we expect returns to be driven solely by earnings growth, leading to less robust returns compared to the past two years. Policy uncertainty regarding tariffs, Fed policy, too restrictive immigration, and political gridlock are all risks that may restrain returns. Yet improving US productivity, the lagged impact of a lower federal funds rate, and the prospect of less costly regulation are tailwinds that may help reduce the bifurcation between large and small stocks’ performance. We expect both stock and bond volatility to heighten as the Fed moves towards the “neutral rate” that neither stimulates nor restrains economic demand.

Disclosures

Tandem Wealth Advisors LLC (“Tandem”) is an SEC-registered investment adviser. The information published herein is provided for informational purposes only and does not constitute an offer of investment advisory services. All information is subject to change without notice. Nothing contained herein constitutes financial, legal, tax, or other advice. No investment process is free of risk, and investors may lose all their investments. Past performance is not indicative of current or future performance and is not a guarantee. The opinions expressed in this document may not fit your risk and return preferences. The information provided is obtained from sources believed to be reliable, but we cannot attest to its accuracy. Past performance is not necessarily indicative of future returns. Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations or comparable terminology. Due to various risks and uncertainties, actual events, results, or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained herein may be relied upon as a guarantee, promise, assurance, or a representation of future events or conditions. Additional copies of Tandem’s ADV Part 2A and/or Privacy Policy are available upon request by phone at 602-297-8600 or by email at [email protected].

Index Definitions

The S&P 500 Index measures the performance of the large-cap segment of the US equity market. The S&P MidCap 400 Index measures the performance of the mid-cap segment of the US equity market. The S&P SmallCap 600 Index measures the performance of the small-cap segment of the US equity market. The Nasdaq 100 is a basket of the 100 largest, most actively traded US companies listed on the Nasdaq stock exchange. The Russell 2000 Index measures the performance of the small-cap segment of the US equity market. The MSCI World Ex USA Index captures large- and mid-cap representation across 22 of 23 developed markets countries, excluding the US. The MSCI Emerging Markets Index captures more than 1,400 large- and mid-cap securities in 24 countries spanning across five regions. The Bloomberg Barclays US Aggregate Bond Index is a broad-based benchmark that measures the investment-grade, US dollar-denominated, fixed-rate taxable bond market. The Bloomberg Barclays Investment Grade Corporates index measures the investment-grade, fixed-rate, taxable corporate bond market. The Bloomberg Barclays Corporate High Yield Index measures the USD-denominated, high-yield, fixed-rate corporate bond market. The Bloomberg Barclays Investment Grade US Convertibles Index tracks the performance of investment-grade, USD-denominated convertible securities. S&P 500 Sectors measure segments of the US stock market as defined by GICS®. All index performance data sourced from Bloomberg.