2024 Economic Recap and Q1 2025 Economic Outlook

Hello,

I hope all is well and that you enjoyed a wonderful holiday season to close 2024 and that you are having a great start to 2025!  

2024 was a strong year for all of the major financial markets. U.S. markets on average delivered double-digit returns! Several factors contributed to the market performance last year, including steadily declining inflation numbers, consistently strong corporate earnings, and exuberance over the Federal Reserve Boards (Fed) shift in policy to begin lowering rates. The inflation rate measured year-over-year from the previous year declined from 7% in 2021 to just 2.9% in December 2024, trending towards the Fed goal of 2%[1]. In Q4 of 2024, 77% of S&P 500 companies reported a positive EPS (earnings per share) surprise, and 63% reported a positive revenue surprise. The estimated earnings growth rate for the S&P 500 during Q4 of 2024 came in at 13.2%, which marked the highest (year-over-year) earnings growth rate by the companies within the index since 2021[2]. The Fed Funds Rate reached as high as 5.5% in 2024 when the Fed, on September 18th, 2024, announced the first cut in four years. In the subsequent months to end 2024, the Fed cut rates to their current level in the 4.25 – 4.5% range[3].

The market has started 2025 on a positive note. The S&P 500 is up 2.66% YTD as of close of business February 4th, 2025[4], The broader Russell 2000 small company index, which has lagged all major indexes for the past three-plus years, is up 2.69% YTD as of the close of business on February 4th, 2025[5]. Enthusiasm for small to mid-sized U.S. companies grew over the second half of 2024 thanks to energy around a lower interest rate environment, deregulation expectations, and a probable increase in mergers and acquisitions. Historically speaking, at the end of a rate cut cycle, the Russell 2000 has generally delivered stronger returns over both 12- and 24-month periods compared to the average returns since inception. On average the Russell 2000 returned 36% over the next 12 months and a cumulative 42% over the next 24 months[6]. On the fixed income front, bond yields finally reached levels we had not seen in nearly 20 years, ranging between 4 to 5%. The bond market, while net positive in 2024, struggled during the year. Ongoing volatility in interest rates and doubts about Fed policy kept returns on bonds low, with the AGG (Aggregate U.S.  Bond ETF) returning less than 2%. Assumptions around tariffs in early 2025 pushed bond yields higher, hence causing returns on bonds to decline. That said, rates have remained relatively steady between 4.4% to 4.6% meaning that the higher baseline interest income on bonds will over time help returns.

“So how will 2025 shape up as far as market performance?” Some positives: Wages and salaries in the U.S. increased 4.5% from December 2023 through December 2024, giving Americans a fighting chance against higher costs of living[7]. Earnings growth remains resilient across U.S. companies. In 2024, S&P 500 companies are reporting year-over-year growth in earnings of 9.4% and year-over-year revenue growth of 5.1%. In Q1 of 2025, projections are 10.1% on earnings growth and 4.8% on revenue growth[8]. Inflation has been coming down, slowly but surely. The Fed remains committed to this interest rate cutting cycle, which has historically promoted growth. The unemployment rate remains low at 4.1%.

Some things to monitor closely: The Expectations Index (a component of the Consumer Confidence Index that measures consumers’ short-term outlook on the economy) came in at 83.9, higher than 80, a number that has usually signaled a recession ahead[9]. Fiscal and regulatory policy from our government that helps more than it hurts. The potential of longer-term tariffs, which may have the impact of shrinking U.S. corporate profitability or, if passed on to consumers, slow consumer consumption.

The most likely downside scenarios, which I do not currently expect but am mindful of, include re-accelerating inflation, higher interest rates, and growing geopolitical uncertainties.

While so much remains uncertain and tricky when it comes to the economy and markets, I remain optimistic! As we have historically, I believe whatever situation we encounter, we will continue persevering through any adversity!

I remain steadfast in my belief in long-term planning, preparation, and proper diversification, while aligning your portfolio to your comfort level for risk. Time and time again, it is proven that markets cannot be timed. No one has a crystal ball, and no one knows what major world event will occur next. Our best strategy is to be well-diversified across asset classes and remain optimistic and vigilant during times of fear and panic. Our companies remain some of the best in the world, providing goods and services to every corner of the earth. Our people are some of the brightest and hardest working in the world. I believe in the long-term trajectory of the U.S. and global economy!

Thank you for the opportunity to serve you. My priority remains and always will be to ensure that you continue to receive high-quality guidance and a client service experience second to none. While I continue to reach out via phone and e-mail, please know that I am available via Zoom, Facetime, any other digital technology you prefer and in person if you would like to meet. I am happy to meet with you at any one of my offices or at your home or near your home, whatever you prefer and with whatever you are most comfortable.

Wishing you, your family, friends, colleagues, and community continued hope, health, and positivity in the coming weeks, months, and beyond!

Thanks!