A quick recap of 2024

While we didn’t get the so-called “Santa Claus” rally this year, stocks ended the year with strong gains for the second year in a row. The widely used (and highly concentrated) S&P 500 index gained over 23% for the year, capping a second 20%+ year in a row, something it has not done in 25 years. Small-cap stocks, as measured by the Russell 2000, were up a more modest 10% for the year. MSCI All World Index, a broad global index of stocks, was up 15% for the year. Gold and silver were up 27% and 21,% respectively, while oil was almost exactly flat on the year. The US dollar rallied 7%, as global central banks cut rates more aggressively than the Fed and the strong US economy attracted flows into US dollar denominated assets. For the second year in a row, Bitcoin was up over 100%.

As has been the case over the last few years, there was a fair amount of dispersion in returns across various sectors, with the tech-heavy NASDAQ up almost 30%. Within tech, semiconductors, driven by the continued boom in AI, led the way with almost a 40% gain. Financials showed a strong showing, particularly on the back of the election and hopes for deregulation and more deal activity. The more defensive healthcare sector only rallied 2%, especially given the uncertainty about the new administration's approach to the industry.

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• As a reminder, 2024 started out with lots of discussion of a recession and the expectations of 7 rate cuts
• Instead, the US economy was the strongest in the developed world, and the Fed cut rates by only 100 bps (the equivalent of 4 rate cuts)
• While most prognosticators expected positive stock market returns, there was no one predicting another 20% year for the S&P 500
• In our view, the S&P 500 is no longer a great representation of the US stock market
• It has become highly concentrated, with 10 stocks representing 37% of the index
• This is significantly higher than 27% in 2023 and only 14% a decade ago
• While all of the top 10 companies are high-quality businesses, 9 out of 10 are technology companies
• This makes the index very reliant on these companies continuing to perform strongly
• A more appropriate measure (in our view) of stock market performance is the equally weighted S&P 500, which was up a much more modest 10.8% for the year
• Additionally, it is important to understand the drivers of return for an index
• As companies within the index grow earnings, their stocks rise to reflect this
• Stocks can also rise if the valuation multiple increases, meaning investors are willing to pay more per unit of earnings than before
• According to Factset, companies in the S&P 500 grew earnings by an estimated 9.4% in 2024
• So the 23% gain in the S&P 500 index was only partially due to underlying earnings growth, but more than half the gain came from multiple expansion
• As we enter 2025, the Price/Earnings ratio (multiple) is estimated to be in the low 20’s%
• The historical range of P/E ratio for the index is 15-18%
• There are lots of reasons cited for higher multiples: higher growth and margins, and lower future taxes and interest rates
• While all are legitimate reasons for higher multiples, over a long enough timeline, valuation multiples tend to revert to the mean
• According to analysts, earnings are going to grow 14.5% in 2025 for the S&P 500, so more gains for stocks are possible; however, they are unlikely to come from multiple expansion
• Instead, we think it is likely that cheaper parts of the market (outside of tech) will start to see earnings growth as they begin to see results from AI, and their multiples will begin to expand
• We will be writing a more in-depth piece about this within a few weeks
• Away from stocks, it is very notable that Gold rallied significantly even as the US dollar was higher
• We believe this speaks to demand coming from countries looking to diversify away from the US dollar
• Bitcoin rallying alongside gold, we believe, could be a function of a similar dynamic (building on Bitcoin as a digital gold use-case)

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