The year 2024 defied expectations, showcasing economic resilience amidst geopolitical and inflationary challenges. Despite market uncertainties, the combination of moderate Fed rate cuts, advances in AI, and favorable views on coming policy shifts fueled significant equity gains, while fixed-income markets navigated volatility driven by rising yields and inflation concerns.
As we reflect on a year of unexpected strength and challenges, the focus shifts to preparing for 2025 with a clear-eyed understanding of emerging opportunities and risks.
Key Highlights
U.S. Economic Resilience: The U.S. economy grew ~2.9% in 2024, driven by strong consumer spending, services sector growth, and advances in AI despite inflationary and geopolitical challenges.
Fed Rate Cuts: The Fed reduced rates by 1.00% in 2024 to 4.5%, signaling a cautious pace for further cuts in 2025 due to slowing inflation progress.
Stock Market Growth: The S&P 500 rose 25% in 2024, marking consecutive years of 20%+ gains, fueled by AI-driven innovation and investor optimism toward the pro-business policies of the new administration.
Interest Rate Dynamics: Long-term yields rose despite Fed rate cuts, creating fixed-income opportunities, while higher mortgage rates further constrained housing affordability.
Reflecting on 2024
Economy
The global economy showed unexpected resilience in 2024, balancing political turbulence, inflationary pressures, and rapid technological changes. The Federal Reserve initiated the long-awaited rate-cutting cycle, with 50 basis points slashed in September, followed by another 50 bps by year-end bringing the Fed Funds rate down to 4.5%. However, the Fed signaled only 50 bps of cuts for 2025 indicating caution amid ongoing inflationary risks as the Fed waits to see what the new administration brings to bear. Despite the challenges of inflation, unemployment, and geopolitical instability, the global economic backdrop remained stable, and the US economy (denoted by real GDP) is projected to have grown by ~2.9% in 2024, aided by strong consumer spending, a commanding services sector, and advances in AI and technology.
Equities
Equity markets delivered a blockbuster year, with the S&P 500 rising 25% to close at 5,881. This marked the first time since the 1990s that the index achieved back-to-back annual gains exceeding 20%. AI-driven innovation has been the primary driver of the Magnificent 7 and the whole S&P 500 in 2024, but renewed investor confidence in pro-business policies under the incoming Trump administration was also a key driver through the last quarter of 2024.
This rally, however, has pushed valuations to elevated levels. Current price-to-earnings (P/E) ratios in large cap stocks are among the highest in the last 50 years, trailing only the years 1999, 2002, 2003, 2009, and 2021. While some investors worry about a potential overvaluation in 2025, others see opportunities in other sectors like fixed income and international equities. Despite high multiples – growth in AI-related industries, including hardware, software, and services, continues to attract capital.
Fixed Income
Bonds faced another challenging year from a price standpoint, continuing a four-year trend of higher 10-year Treasury yields. Early in the year, bond markets rallied following the Fed’s September rate cut, with the 10-year Treasury yield dropping to a mid-year low of 3.6%. However, inflation concerns and robust nonfarm payroll growth (+254k in September) led to a reversal. By year-end, the 10-year Treasury yield had climbed to 4.57%, up from 4.06% in January, reflecting market expectations of higher inflation and the potential of fiscal stimulus under unified Republican control of the White House, Congress, and the Senate.
Mortgage rates followed a similar trajectory, with the average 30-year fixed mortgage rate climbing to 6.85% from a low of 6.08% in September, further squeezing affordability in the housing market.
While rising yields negatively impacted bond prices, they have enhanced the appeal of fixed income as a source of yield for income-focused investors. Treasury yields are now providing competitive returns, shifting bonds back into focus for their attractive income.
Takeaways for 2025
As we reflect on the events of 2024, a few key lessons emerge that investors can carry forward into the coming year:
1. Long-Term Over Short-Term: The markets have demonstrated that staying invested for the long haul, rather than attempting to time market movements, is often the better approach. Despite significant headwinds through 2024, the long-term trend in equities remained strong, proving the importance of disciplined investing.
2. Economic Predictions Are Not Perfect: Projections, even from top experts, often deviate from actual outcomes. Many forecasts for 2024 misjudged key factors, such as the scale of AI’s market influence or the persistence of inflationary pressures. These examples underscore that predictions can err in both directions—being either overly optimistic or overly cautious.
3. Yield Opportunities Are Back in Focus: With bond yields rising to multi-year highs, fixed income securities remain attractive as part of a balanced portfolio. The return of yield opportunities offers investors a chance to enhance income generation while diversifying across fixed-income assets.
4. Diversification Across Geographies and Sectors: While U.S. equities surged in 2024, the elevated valuations highlight the need for diversification into other regions and sectors of the market.
The lessons of 2024 underscore the importance of a balanced, forward-looking strategy as we navigate the complexities of 2025. By focusing on time in the market, diversification, and adapting to new data, investors can position themselves to manage risk and capture opportunities in 2025.
Allen, Henry and Jim Reid. “December, Q4 and 2024 Performance Review.” Deutsche Bank Research, January 2, 2025
Morgan Stanley. “Stock Market Review 2024: 5 Questions for 2025.” Morgan Stanley, https://www.morganstanley.com/ideas/stock-market-review-2024-questions-2025. Accessed January 2, 2025.
Multpl. “S&P 500 P/E Ratio by Year.” Multpl, https://www.multpl.com/s-p-500-pe-ratio/table/by-year. Accessed January 2, 2025.
IMPORTANT DISCLOSURE: The information contained in this report is informational and intended solely to provide educational content to our clients and other readers that we find relevant and interesting. Opinions expressed are just that, and are current only as of the data of publication Nothing in this document should be construed as investment advice; we provide advice on an individualized basis only after understanding your circumstances and needs. The information presented in this newsletter is based on reports from Deutsche Bank and Bloomberg’s ‘Markets Daily’ series. Data provided comes from sources we believe are reliable, but accuracy is not guaranteed. Discussion of sectors and the performance of region-specific equities and bonds generally refers to market indices. We use the S&P 500 to represent US large-cap; the Willshire Small Cap to represent US small-cap; the MSCI ACWI ex US to represent international equities; the US 10-year Treasury Yield to represent US Treasuries; the ICE BofA European Government Bond Index to represent European bonds; the ICE BofA US Corporate Index Effective Yield to represent investment-grade bonds; the ICE BofA US High Yield Index Effective Yield to represent high-yield bonds; the FRED 30-Year Fixed Rate Mortgage Average in the United States to represent mortgage rates. Indices are unmanaged, are not subject to investment management fees or transaction costs, and it is not possible to invest in an index. Index performance can provide general information about how a particular region or investment has performed, but does not provide information about the performance of Ceva’s client portfolios. Actual client performance may differ materially from the index performance discussed. Past performance is not a guarantee of future results. Financial planning is a tool that can help clients consider different current and future scenarios and construct portfolios designed to meet specific goals and address specific risks. Financial planning does not guarantee a positive outcome or prevent loss. It’s important to revisit financial plans and the underlying assumptions of those plans regularly, and to make adjustments as needed to respond to changing circumstances.
