A Stellar 2024 and Optimism for 2025
The S&P 500 closed out 2024 with impressive gains of over 23%, while the Nasdaq, heavily weighted with tech stocks, soared nearly 29%. The Dow Jones Industrial Average delivered a more moderate return of just under 13%, reflecting its lower exposure to technology. By year-end, all major indices were approaching record highs, with the S&P 500 notching 57 record closes. Coupled with a strong 2023, the last two years have marked the best combined market performance in a quarter-century.
Driving much of this growth were the "Magnificent Seven" stocks—Alphabet (Google), Amazon, Apple, Meta Platforms (Facebook), Microsoft, Nvidia, and Tesla—which expanded their collective share of the S&P 500 to nearly one-third from a quarter at the start of the year.
Sustained Momentum as 2025 Begins
Optimism and high expectations have continued to define the economic outlook. The U.S. economy remains strong, with robust earnings growth fueled by significant consumer and government spending over the summer. Gross domestic product (GDP) expanded at an annualized rate of 2.8% in the third quarter, slightly below the second quarter’s 3.0%, maintaining a two-year streak of steady economic growth despite persistently high interest rates.
Corporate earnings, which have been rising rapidly, are projected to accelerate further, with analysts forecasting a 15% increase in 2025. Although current valuations are high compared to historical norms, many analysts argue that strong earnings and unexpectedly robust productivity growth provide a solid foundation for these elevated levels.
Looking ahead, the U.S. may be on the brink of a productivity boom reminiscent of the 1990s Internet boom. Rising productivity could help offset the challenges posed by surging national debt while benefiting various sectors of the economy. Worker productivity grew by 2.0% or more throughout 2024, compared to the pre-pandemic average of 1.6%. This improvement is attributed to factors such as better job matching in the post-COVID labor market and the growing impact of artificial intelligence.
Additionally, a significant increase in new business formation hints at further advancements, as entrepreneurs drive innovation and improve operational efficiency. In contrast, the European Union and much of the rest of the world lag behind, generating fewer startups that also tend to scale at a slower pace.
Forecasts for the Next Decade are Less Positive
Despite near-term enthusiasm, not all forecasts are rosy. Goldman Sachs anticipates that the S&P 500 will deliver average annual returns of just 3% over the next decade, citing potential challenges to Big Tech’s dominance. Bank of America is even more bearish, predicting returns of only 0%-1% annually.
Yet both firms recommend remaining invested in equities. Historical data shows little correlation between high valuations and short-term performance. Many also argue that the current era of U.S. economic strength warrants a “U.S. premium," as geopolitical tensions, tariffs, and state intervention continue to suppress growth prospects in other regions.
Balancing Optimism and Risk
Heading into the new year, market sentiment remains highly optimistic, which is expected to sustain short-term gains. However, the longer-term outlook is more uncertain, and the risk of a correction looms if unforeseen challenges arise. While the near-term outlook is bright, there is less room for error should sentiments change.
- Daniel Wildermuth, Portfolio Manager
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