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Summary
That’s a Wrap: A Positive 2024 To cut to the chase, 2024 was a highly positive year for stocks. But the start and middle were better than the finish, as confidence that inflation and interest rates were heading decisively lower began to diminish. There were also multiple positives, some of which intensified into year-end. Market participation across sizes and styles was more even in 2024 than in 2023, which was similarly a good year for stocks. Corporate earnings of the largest U.S. companies (the S&P 500) shook off a multi-quarter negative trend exiting 2023 and showed accelerating growth into year-end 2024. Inflation was lower at year-end 2024 than at year-end 2023, but momentum toward reaching the Fed’s 2% target slowed as the year progressed. Interest rates eased along with inflation during most of 2024, but long rates rose into year-end due to a variety of factors. One of those factors was the reelection of Donald Trump, as his promised policies carry a mix of risk of opportunities and challenges. Throughout 2024, we discussed the overall market outlook in terms of simple vowels. The three ‘Es’ (of employment, earnings, and the economy) acted as positive offsets to the ‘Is’ (of inflation, still too high for comfort, and interest rates, at levels high enough to reduce spending on big-ticket items such as cars and houses). At year-end 2024, we find these five key concepts continuing to drive the market. The Stock Market in 2024 Despite some December weakness, and notwithstanding a collapse in the final trading sessions of the year, U.S. stock indices were all highly positive for 2024. As of market close on 12/27/24, the S&P 500 was up 25.2% on a capital-appreciation basis and (assuming reinvestment of dividends) up 26.9% on a total-return basis. The Nasdaq was up 31.4% on a capital-appreciation basis and 32.2% on a total-return basis. The DJIA was up 16.2% and 14.1%, respectively, with dividends representing more than 2% of hypothetical total return for the blue-chip index. Although the Dow lagged the other major indices in 2024, its mid-teens gain was still better than the performance by the broad market (the S&P 500) in an ‘average’ year. The performance map for the three major indices stands in contrast to 2023, when the Nasdaq Composite rose nearly twice as much as the S&P 500, and the DJIA was a deep laggard. The more-even performance between S&P 500 and Nasdaq is also reflected in the sector map for 2024. Within the S&P 500, and using the S&P sectors, five of the 11 U.S. sectors are up at least 20% on a total-return basis in 2024. Using the iShares sector ETFs, five sectors are also up over 20% on a capital-appreciation basis. Based on the S&P sectors, the best performances came from Communication Services and Information Technology, both up over 40%. In a stunning recovery from mid-year weakness, Consumer Discretionary rose 34%. And the Financial sector was up 32%. The final 20%-plus sector in 2024 was Utilities, up 24%. The other income-dependent sector, Real Estate, had an up-and-down year. REITs were down at mid-year, rose in high teen percentages in the third quarter, and finished the year largely unchanged from opening levels. In 2023, the S&P 500 also rose more than 20%. But only three sectors were strong, while the other eight had an average gain of less than 4%. While the three 2024 leaders are repeating their 2023 success, the Financial sector delivered half the market performance in 2023, while Utilities were down 8%. In our view, this sector breadth is the most-important feature of the 2024 U.S. stock market — and we think this is a very positive indicator for 2025. The Economy, Earnings, and Employment In December 2023, we provided base case, bull case, and bear case scenarios for 2024. The 2024 year unfolded mainly in line with our base case, in that inflation fell below 3%; the Fed began to cut rates, though in the fall rather than our forecast for mid-year cuts; recession was avoided; and a victor was efficiently declared in the presidential race. But the market did much better than our base-case forecast of 8%-12% gain. The S&P 500 in 2024 rose more than twice as much as we forecast in our base-case scenario. U.S. GDP, which increased 2.9% in 2023 and 2.5% in 2024, began the year with 1.6% growth in 1Q24. But the economy grew at least 3% in both 2Q24 (3.0%) and 3Q245 (3.1%). According to the Atlanta Fed’s GDPNow Tracker, the U.S. economy is on track for 3.1% growth again in 4Q24. GDP growth is cumulative and not a simple average of the four quarterly changes. On that basis, the U.S. economy is on track for growth in the high-2% range for 2024. Argus Director of Economic Research Chris Graja, CFA, looks for 2.6% U.S. GDP growth for 2024. For 2025, he is modeling low-2% GDP growth with a stronger second half. We expect the U.S. economy to avoid recession in 2025. A key source of this growth and the economy’s overall health is resilient, employed consumers. November nonfarm payrolls increased by a better-than-consensus 227,000, reflecting a bounce-back from hurricanes in October and the resolution of the Boeing machinists’ strike. The 12-month average through November 2024 is 184,000, below the 2023 tally but better than our expectations coming into 2024. Unemployment was 4.2% in November. But the days of job-jumping appear to be over, as the employment situation has entered a ‘low-fire, low-hire’ phase. There are still more job openings than people who are unemployed, though the gap is narrowing. And higher-paying jobs are now harder to find. The Fed’s unemployment forecast is 4.4% in 2025 and 4.2% over the long term. Unemployment in a range of 4.0%-4.5% is near full employment, which is the lowest rate consistent with price stability. In mid-December 2024, we raised our 2025 and 2026 forecasts for S&P 500 earnings from continuing operations. For 2025, we raised our earnings forecast for to $276, from $265. Our revised 2025 forecast models full-year EPS growth of about 12%. Our increased optimism toward 2025 earnings reflects expected better performance for three sectors that were negative in 3Q24: Energy, Materials, and Industrials. Materials and Industrials could swing to positive comparisons as soon as 4Q24 (Materials) and 1Q25 (Industrials). Energy could take a little longer, generating positive comparisons by 2Q25. For 2026, we raised our forecast for S&P 500 earnings from continuing operations to $307. Our revised forecast models full-year EPS growth of about 11%. The slightly more moderate growth outlook for 2026 is due to more challenging comparisons. We expect the AI transformation to continue to drive growth in Communication Services, Information Technology, and Consumer Discretionary. We look for growth to slow in defensive sectors but to pick up in Energy. While overall economic growth is sound, it is currently perhaps too reliant on the fully employed consumer. The industrial and commercial economy is still being impacted by high financing costs and by the ongoing struggles of several former industry leaders (Intel and Boening, for example). On a positive note, the long-struggling housing sector is showing signs of life. U.S. pending home sales rose 12.1% year over year in November, the biggest increase since 2021. More than mortgage rates, which remain stubbornly high, recovery in housing likely reflects the pent-up demand from the post-pandemic period as inflation and interest rates rose. Inflation and Interest Rates Inflation measures are trending towards the Federal Reserve’s stated goal of 2%, but even the Fed has noted slowing momentum in the fight. Overall prices are not declining, they are
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