We have closed out another great year of stock market performance. The S&P 500 total return index (which includes dividend reinvestments) rose 25.02% in 2024. This is after the index rose 26.29% in 2023. Here is a picture of the index returns for the past 5 years:

Figure 1: S&P500 Total Return Index annual returns for the past 5 years (From Kwanti)

When you look at it like this, the terrible year of 2022 just looks like a little blip. The S&P500 was fueled by the so-called Magnificent 7 stocks: Apple, Amazon, Google, Meta, Microsoft, NVIDIA, and Tesla. The following chart shows this performance in relationship to the rest of the S&P500:

Figure 2 Magnificent 7 performance (From JPMorgan)

The magnificent 7 stocks rose 48% and the S&P500 without the magnificent 7 rose only 10%, which is still a respectable performance.

Bond returns were not nearly as good. The Bloomberg Barclays US Aggregate Bond Index returned 1.24% in 2024. This is well below the 4 to 5% interest you got from a good high-yield savings account for most of 2024. Why? It’s because long-term interest rates continued to increase in 2024, even while the Federal Reserve was dropping short-term interest rates. The average yield of 10-year treasury bonds went from 3.88% at the beginning of the year to 4.58% by the end of the year. Short-term bonds were not nearly as affected. Return for 2-year treasury bonds was 3.79% last year with yields staying around 4.25%. 

To round things out, international markets were mildly higher with the MSCI EAFE index (Europe, Canada, and developed Asia) up 4.3% and the MSCI Emerging Markets index up 8.1%.

Why were markets so good when many people seemed to think the US needed change and worries about the economy were high on everyone’s political to-do list? I think the major factor was probably inflation. Inflation started the year at 3.4% according to the Bureau of Labor Statistics. It ended the year at 2.9% as measured by the year-over-year increase of the Consumer Price Index. Economists call this disinflation or a reduction in the rate of inflation. We continue to have inflation (or price increases), but the rate of increase has lessened. Deflation or reduction in prices is actually very unhealthy for an economy, usually accompanied by high unemployment. Still, the Federal Reserve’s inflation target is 2%, not 2.9% and there is reason to believe that the economy is resilient enough that slightly higher inflation is here to stay.

The job market continues to be fairly strong, although not as strong as it was for the past couple of years. Still the Fed was looking for some cooling in the job market and to some extent it got what it wanted.

The Future

Predicting the future is a losing proposition. But I am comfortable talking about general trends and risks. As a general trend we have disinflation, a steady job market, and good corporate earnings. This would indicate that the US economy is in good shape, and we are unlikely to enter a recession any time soon. Does this mean the stock market will continue to rise? It’s certainly possible. The stock market is ultimately driven by the perception of increasing corporate earnings. The major risk is really that stocks are very richly priced at the moment (see below). But that can continue to be true if corporate earnings continue to exceed expectations.

Now the risks. One very big risk to the S&P500 itself is the very expensive nature and overconcentration of the index. The Price Earnings ratio is very high historically and the index is highly concentrated with the magnificent 7. This was true last year too and the market still went up, but it’s even worse this year. See the figure below:

I think the extreme valuation of the Magnificent 7 stocks is a particular risk to those stocks and the S&P500. That does not mean that you can’t make money in the stock market in 2025. It just might be a good idea to invest in a diversified portfolio which includes areas of the market which are more reasonably priced. These might include value stocks, small-cap stocks, international stocks, and even emerging market stocks. 

Another risk is continuing inflation. This will keep pressure on the bond market, since the Fed might decide not to drop short-term bond rates and longer-term rates might increase anyway. If President Trump’s agenda looks to cause inflation or additional borrowing, this might also cause rates to increase which will lower bond prices and cause problems for the stock market. If nothing else, inflation scares during the year is likely to cause turmoil in the markets and might increase volatility.

President Trump’s proposed tariffs combined with immigration policies could also have unexpected side-effects for corporate profits. These policies may cause input prices for labor and goods to rise in the US. This will put pressure on corporate earnings. At the same time higher interest rates can cause lower liquidity in the markets which may drive down the price of risk assets (think growth stocks and cryptocurrencies). If the richly-valued stock market is driven by corporate earnings and those earnings do not meet expectations, then there needs to be an adjustment on the price of these stocks. 

Conclusion

In summary, the markets could still do well in 2025, but there are definite risks, primarily driven by high valuations that price stocks for success. Remember that you make money by buying low and selling high. If you buy high and expect to sell higher, you could be disappointed.

The first quarter is a great time to look at things happening in the new year and plan out your retirement savings if you are still working or your required distributions if you are retired. There are some new 401(k) and IRA rules that have come into effect this year. Anyone who turns 73 in 2025 will have to start their required minimum distributions. If you are working, then you can calculate whether you can still make IRA or ROTH IRA contributions for 2024. If you are self-employed, you may still be able to start and fund a SEP IRA. For these and any other questions, please reach out to our team. If we are not managing your investments, we would be happy to chat with you about doing so. Check out our website at www.cereusfinancial.com for disclosures and more information including other blog articles. 

Cereus Financial Advisors, LLC (“Cereus”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Cereus and its representatives are properly licensed or exempt from licensure.

This article contains my views and opinions, which are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.  Past performance shown is not indicative of future results, which could differ substantially.

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