Alert
Q4 Market Review and 2025 Outlook
The S&P 500 ended 2024 with an impressive 23.31% gain, achieving its first back-to-back years of returns over 20% since 1998.
US markets rallied in the fourth quarter, fueled by investor optimism following Donald Trump’s presidential victory and the Republican red sweep of Congress.
Expectations for deregulation, corporate tax cuts, and infrastructure bolstered sentiment. The rally was narrowly concentrated in the communication services, information technology, and consumer discretionary sectors.
The end of the quarter saw the markets’ enthusiasm fade as the Federal Reserve (the Fed) adopted a hawkish tone at its December meeting. The committee did cut rates by 25 basis points (bps) but tempered their outlook for cuts in 2025, due to the potential for inflationary pressures from proposed tariffs and stricter immigration policies by the new administration.
Despite this, 2024 marked the S&P 500’s strongest two-year performance since the late 1990s.
View the latest insights on markets and economic trends to help inform your investment strategy.
Key Takeaways on the Economy and Markets
Notable takeaways are as follows:
- Federal Reserve Policy. The Fed remains in rate-cutting mode but has adopted a cautious approach for 2025, mindful of potential inflationary impulses from tariffs and immigration policies.
- Economic Growth. Growth and strong labor market trends support a constructive 2025 outlook, with the services sector showing resilience.
- Stocks and Bonds Outlook. Long-term prospects remain positive as the economy normalizes, corporate earnings continue to be robust, deflationary trends persist albeit more slowly, and monetary policy eases.
- Risks. Key risks include a potential inflation rebound, rising long-term yields, sharper-than-expected economic downturns, and escalating geopolitical stresses.
The Economy
The US economy has shown remarkable resilience, with real gross domestic product (GDP) expanding at an above-average pace over the past four years. Consumer spending remains strong, while inflation continues its downward trajectory, albeit at a slower pace in recent months.
The labor market has softened slightly but has stabilized at a healthy level. With a new administration set to take office in January, investors will closely watch policy developments and their potential impact on the broader economic landscape.
Corporate Earnings in 2024
The stock market's performance in 2024 was largely driven by consistently strong corporate earnings. Projections for the fiscal year point to an impressive 9.5% annual earnings growth, surpassing the 10-year average of 8%. This robust performance has highlighted the resilience of equities, setting a solid stage for 2025.
The Federal Reserve
With inflation easing and the labor market achieving stability, the Fed has continued its rate-cutting cycle. However, the 2025 outlook remains uncertain. Should policies from the incoming administration generate upward pressure on inflation, it could slow the pace of monetary easing.
Fixed-Income
The Bloomberg Aggregate Bond Index delivered a -3.1% return in the fourth quarter, with the 10-year Treasury yield climbing to 4.57% by the year's end. This increase in yields reflects market uncertainty about the Fed’s future actions amidst inflation concerns.
High-yield bonds outperformed investment-grade options during the quarter, bolstered by pro-business sentiment following the Republican election victory. Ending yields across the fixed income markets are attractive and present long-term opportunities.
Labor Market
The labor market has reached a point of normalization, and looking ahead, steady economic growth and strong corporate profits are expected to support moderate hiring. However, potential policy changes from the Trump administration—such as stricter immigration measures—could introduce an inflationary bias to wages.
Inflation
Inflation made significant strides toward the Fed’s 2% target in 2024, enabling the Fed to begin reducing interest rates. However, the downward momentum slowed in the fourth quarter, raising concerns that progress may have stalled.
Notably, headline consumer price index (CPI) increased by 2.7% year-over-year in November, up from 2.4% just two months earlier. Despite these gains—primarily attributed to base effects—there’s little evidence of escalating price pressures, suggesting inflation is likely to resume its downward path in 2025.
2025 Market Outlook
Three key takeaways stand out for the 2025 market outlook:
- Economic growth and fiscal policy
- Equity market projections
- Fixed-income opportunities
Economic Growth and Fiscal Policy
Economic growth in 2025 is projected to remain strong, supported by resilient consumer spending, solid household balance sheets, and fiscal policy incentives such as the Inflation Reduction Act and the CHIPS and Science Act.
Equity Market Projections
AI-driven stocks may see more moderate gains as investors rotate toward more cyclical themes like domestic manufacturing and small caps.
Fixed-Income Opportunities
Attractive yields and tighter spreads provide a positive backdrop for fixed-income investors. The 2025 environment is expected to support both investment-grade and high-yield markets.
Key Themes for 2025
Key themes heading into 2025 are:
- Coordinated monetary easing
- Inflation risks
- Private market opportunities
Coordinated Monetary Easing
Recent policy easing provides a supportive macro backdrop for US and global demand. While job creation may slow, robust productivity gains and wage growth are expected to offset potential economic headwinds.
Inflation Risks
Tariffs and immigration policies could introduce price shocks, though improving productivity may counterbalance inflationary pressures.
Private Market Opportunities
Private market opportunities exist both with private credit and private equity.
Private Credit
Increasing demand for bespoke credit solutions, driven by a challenging rate environment, is expected to expand private credit’s role in financing.
Private Equity
An end to the IPO drought could unlock value in large private companies, while lower interest rates are likely to stimulate M&A activity.
Investors should prepare for heightened volatility in 2025 as markets navigate economic, policy, and geopolitical developments. However, the ingredients for robust growth remain in place, with the US continuing to drive global economic expansion.
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