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Key Takeaways
U.S. stocks led the way again in 2024 with a 24% return, while foreign markets struggled in Q4 despite early-year gains.
Cryptocurrencies soared 102% in 2024, driven by ETF launches and favorable political developments, making them the year's top-performing asset class.
Mega-cap stocks dominated the S&P 500, but their lofty valuations highlight the need for diversification into smaller, more reasonably priced companies.
The U.S. economy outperformed expectations with 2.7% GDP growth forecasts for 2024, but stubborn inflation and elevated interest rates remain risks for 2025.
The Tax Cuts and Jobs Act (TCJA)’s 2025 sunset could cut estate tax exemptions in half, urging proactive planning to avoid increased tax exposure.
Market review
2024 marked another year of strong market performance, with all major asset classes ending the year positively. U.S. stocks led the way returning 23.8% while foreign stocks lagged. Developed markets gained 4.7% and emerging markets climbed 7.5%. Although foreign stocks had a strong start to the year, they experienced significant declines in Q4, with developed markets down -7% and emerging markets down -8% during that quarter[1]. Global real estate posted the weakest performance in Q4, with a -9% return, ending the year with only 2.8% gain.[2]
Market Performance [Source: Quarterly Market Review – Fourth Quarter 2024 by Dimensional Fund Advisors] [3]
The emerging asset class of cryptocurrencies saw an extraordinary year, delivering a 102%[4] return, fueled by the launch of multiple cryptocurrency ETFs and favorable political developments, such as the election of crypto-friendly Donald Trump as U.S. president. Large-cap stocks outperformed small-cap stocks, with annual returns of 24% and 11%, respectively[5]. Growth stocks also outpaced value stocks in 2024.
The trend of large companies growing even larger remained dominant throughout 2024, with the top seven S&P 500 stocks, often referred to as the "Magnificent Seven," now representing a third of the index. These seven stocks delivered an average return of 65% and were responsible for 57% of the index's total return[6]. Nvidia stood out once again as the best performer among them, delivering a staggering 177% return in 2024. Meanwhile, Microsoft, the group’s weakest performer, managed only 14% return — lagging behind its 2023 return of 57% and the broader S&P 500's 25% gain[7].
While the past two years have been exceptional for these mega-cap stocks, investors' expectations for these companies have reached lofty levels, raising the risk of disappointment. Rather than betting on the continued perfection of a select few, we believe that diversifying into smaller companies with more attractive valuations could offer significant benefits in the years ahead.
Among individual holdings, cryptocurrency ETFs dominated the fourth quarter. Bitcoin ETF delivered a 47% return, followed by Ethereum ETF at 29%, and U.S. large-cap stocks at 2.8%[8]. On the downside, long-duration bonds (EDV) saw the largest quarterly loss, dropping -13%, reflecting rising yields driven by inflation concerns and expectations for higher interest rates[9].
U.S. stock market growth was supported by a combination of earnings growth and Price/Earnings multiple expansion (when the Price we pay for $1 of company’s Earnings increases). In 2024, S&P 500 companies increased their earnings by 9%[10], exceeding expectations set at the start of the year. With optimism for a better future, market participants were willing to pay higher valuations, as reflected by the forward 12-month Price/Earnings ratio, which rose from 20.0 in Q4 2023[11] to 21.4 in Q4 2024[12]—above the 5-year average of 19.7. Looking ahead, earnings growth is projected to accelerate further in 2025, with an anticipated growth rate of 14.8%[13].
The bond market faced headwinds in Q4, with U.S. bonds losing 3%, while ex-U.S. bonds gained only 0.7%[14]. Yields on long-duration bonds rose sharply due to rising concerns about inflationary pressures and the Federal Reserve’s potential for keeping rates higher for longer. In response to higher rates and elections, the U.S. dollar strengthened by 7%[15] in Q4, reflecting market confidence in U.S. economic stability and expectations for tighter monetary policy.
Economy
The U.S. economy continued to show resilience in 2024, with GDP growth outperforming expectations. Q3 growth was revised upward to 3.1%[16], the strongest quarter of the year, while Q4 is estimated at 2.7%[17], bringing the full-year growth to expected 2.7%[18], a meaningful improvement from forecasts made a year earlier.
With two more interest rate cuts by the Fed in Q4, we ended 2024 at 4.25-4.50%[19], a full 1% lower than the peak reached in 2023 and in place for more than a year. While inflation progress appeared to stall in late 2024, the labor market continues to gradually cool down. After reaching a low of 2.4%[20] in September, inflation rose to 2.9%[21] by December, driven by services, like shelter and transportation. While this remains below the 3.4% observed in December 2023, it is still above the Federal Reserve’s target of 2%. The unemployment rate is currently at comfortable 4.1%[22] (December), and slightly lower than November at 4.2%. However, as we can see in chart below, it is increasing since the lows of 2022 and 2023. Based on the current conditions the Federal Open Market Committee (FOMC) midpoint target range for the federal funds rate for 2025 is 3.75-4%[23], in line with market according to CME FedWatch tool.
Civilian unemployment rate [Source: U.S. Bureau of Labor Statistics]
Big news of the past quarter was the US election. With Donald Trump and republican’s being in charge, the incoming administration’s policies are likely to play a significant role in shaping the economy in 2025 and beyond. Key elements of the agenda that we might expect include:
Tax Cuts: Reducing corporate and personal tax rates to stimulate investment and consumption.
Regulatory Efficiency: Simplifying bureaucratic processes to improve business productivity.
Government Spending Reductions: Lowering non-essential expenditures to manage the fiscal deficit.
Tariffs: Tariffs are import duties paid by the US importer to the US government. By making foreign goods more expensive to import, tariffs make domestic goods more competitive and desired, encouraging local production and promoting long-term economic self-sufficiency.
Sunset of Tax Cuts and Jobs Act
As the Tax Cuts and Jobs Act (TCJA) approaches its sunset at the end of 2025, now is the time for clients to consider their estate plans, particularly regarding the lifetime gift exemptions. The current estate and gift tax exemptions, which are at historically high levels, will be halved when the TCJA expires unless Congress acts to extend the provisions. This reduction means a significant increase in exposure to the 40% estate tax for estates exceeding the new threshold.
While our expectation is that the TCJA will likely be extended, the uncertainty surrounding this issue warrants an abundance of caution. Clients may want to take advantage of the higher exemptions while they are available to make substantial gifts or other strategic estate planning moves. Waiting until the last moment could lead to missed opportunities, especially as estate planning attorneys become inundated with year-end requests. We strongly encourage meeting with your estate planning attorney sooner rather than later to develop a proactive plan.
Authors: Mark VanderPol, CFA, CFP; Richard Toth, CFA, CAIA; Noah Hoekstra
References
[1-2] Source: Quarterly Market Review – Fourth Quarter 2024 by Dimensional Fund Advisors
[3] US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net dividends]), Emerging Markets (MSCI Emerging Markets Index [net dividends]),Global Real Estate (S&P Global REIT Index [net dividends]), Commodities (The Bloomberg Commodity Total Return Index), US Bond Market (Bloomberg US Aggregate Bond Index), Global Bond Market ex US (Bloomberg Global Aggregate ex-USD Bond Index [hedged to USD]), Crypto (S&P Cryptocurrency MegaCap Index)
[4] S&P Cryptocurrency MegaCap Index
[5] Source: Quarterly Market Review – Fourth Quarter 2024 by Dimensional Fund Advisors
[6-7] Source: https://www.barrons.com/articles/magnificent-7-stocks-nvidia-apple-tela-c481ed78
[8-9] Source: Morningstar Office
[10] Source: Earnings Insight January, 3 2025 by FactSet Research Insight Inc.
[11] Source: S&P 500 Earnings Season Update: January, 26 2024 by FactSet Research Insight Inc.
[12-13] Source: Earnings Insight January, 3 2025 by FactSet Research Insight Inc.
[14] Source: Quarterly Market Review – Fourth Quarter 2024 by Dimensional Fund Advisors
[15] U.S. Dollar Index (DXY) [Source: The Wall Street Journal a Dow Jones Company]
[16] Source: U.S. Bureau of Economic Analysis [News Release December 19, 2024]
[17] Federal Reserve Bank of Atlanta’s GDPNow as of 1/09/2025
[18] Source: The Conference Board Economic Forecast for the US Economy [December 17, 2024]
[19] Source: Board of Governors of the Federal Reserve System [https://www.federalreserve.gov/]
[20-22] Source: U.S. Bureau of Labor Statistics
[23] Source: Board of Governors of the Federal Reserve System [https://www.federalreserve.gov/]
Disclosures
VanderPol Investments, LLC (“VPI”) is a registered investment adviser located in Michigan. VPI may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements.
This presentation is limited to the dissemination of general information regarding VPI’s investment advisory services. Accordingly, the information in this presentation should not be construed, in any manner whatsoever, as a substitute for personalized individual advice from VPI. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Any client examples were hypothetical and used to demonstrate a concept.
Past performance is not indicative of future performance. Therefore, no current or prospective client should assume that future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by VPI), or product referenced directly or indirectly in this presentation, will be profitable. Different types of investments involve varying degrees of risk, & there can be no assurance that any specific investment or investment strategy will suitable for a client’s or prospective client’s investment portfolio.
Various indexes were chosen that are generally recognized as indicators or representation of the stock market in general. Indices are typically not available for direct investment, are unmanaged and do not include fees or expenses. Some indices may also not reflect reinvestment of dividends.
VPI may discuss and display, charts, graphs, formulas which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. Such charts and graphs offer limited information and should not be used on their own to make investment decisions.
