Newsletter
Dear Client,
2024 marked an outstanding year for U.S. equity markets with the S&P 500 achieving a second consecutive year posting over 20% annual returns, a feat not accomplished since 1997-1998. The S&P 500 hit 57 all-time highs throughout the year thanks in large part to Federal Reserve rate cuts, cooling inflation, strong consumer spending, the growth of AI, and the re-election of Donald Trump. Market concentration continued to be a key factor and reached historic levels, with just 10 stocks accounting for 33% of the S&P 500’s value in 2024.
The U.S. economy remained resilient, and a strong labor market - coupled with cooling inflation - led to a more cautious stance from the Federal Reserve which opted to continue its pause in the funds rate until ultimately beginning to ease in September. Shifting rate expectations led to a volatile year in the U.S. Treasury market. The U.S. economy outperformed expectations, raising concerns about persistent inflation, while the pace of Federal Reserve rate cuts came under question towards the latter half of the year. In addition to that, the swelling fiscal deficit sparked concerns about growing bond issuance and higher servicing costs. The 2-year U.S. Treasury Note, which is highly sensitive to changes in monetary policy, started the year around 4.30% before climbing as high as 5.03% in the spring, fell below 3.60% in the fall, and ended the year around 4.25%. The 10-year note, largely regarded as a bellwether for long-term inflation expectations, started the year around 3.90% before hitting a high of 4.70% in the spring, then fell to 3.6% in the fall, and finished the year back up around 4.55%.
Earnings growth will need to be a key contributor if equities are going to take the next leg higher. Unlike the last 2 years, more aggressive EPS growth estimates to start the year will set a higher bar for an “upside surprise” in 2025. Moreover, this Fed easing cycle will likely be less dovish than previous ones given the overall strength of the economy. Key risks to markets ahead are a disorderly rise in interest rates due to a reacceleration in inflation and larger deficits, disappointing Mega-cap Tech/AI earnings, frozen housing activity given record unaffordability, more substantial tariffs than expected, and sustained weakness in the labor market. Volatility in currency markets is also likely as tariff wars and large fiscal imbalances create atypical market dynamics from recent cycles, and competitive devaluation is not out of the question in the coming years.
While equity valuations appear extended, it is entirely possible this cycle has more room to run. Higher valuations, positive sentiment, and rising estimates likely lead to a year of more modest returns, particularly relative to 2023 and 2024. However, deregulation, easy financial conditions, lower net equity issuance, robust stock buybacks, and potential tax cuts all remain supportive. The substantial outperformance of the S&P 500 relative to its international peers can also continue if the new administration’s desire for economic independence comes to fruition. Increased domestic energy production from traditional sources, especially considering the surging energy demands driven by AI, is a focal point of President Trump’s new team. Enacting tariffs, and economic expansion will all need to be considered against the potential for reaccelerating inflation. According to the Federal Reserve, money market balances reached $6.5 trillion in October compared to $4.8 trillion at the beginning of 2020. As rates decline globally, investors will seek higher return products. Given this backdrop we continue to favor U.S. equities, agency mortgage-backed securities, and municipal bonds.
We thank you for your continued support and wish you all a healthy and productive new year.
Regards,
Edge Wealth Management
Past performance does not guarantee future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product directly or indirectly referenced will be profitable, equal any corresponding indicated historical performance level, or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. This content does not serve as the receipt of, or as a substitute for, personalized investment advice from Edge Wealth Management, LLC. If you have any questions about the applicability of any content to your individual situation, we encourage you to consult with the professional advisor of your choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request or by selecting “Part 2 Brochures” here.