One question I get asked on a frequent basis and was front and center at our Outlook breakfast, regards the economy and financial market performance with a new President. Since the investment markets have been in the news lately, let us begin with a review of 2024 and the outlook for 2025.
In 2024, the market averages had a strong year, but a look “under the hood” revealed some trends that are a bit concerning. Below are what I consider the key facts looking back:
2024
- The S&P 500 stock index (also known as the Standard & Poors 500) had a strong year. This index is market weighted, meaning that larger companies have a bigger impact on return figures. One analysis shows the largest 10 companies currently make up nearly 50% of the index.
- Close to 65% of the performance for the year came from 7 of the largest stocks. 81% of the 500 companies underperformed the index performance for the year.
In summary:
- Performance for 2024 was dominated by a select few companies. It is unhealthy to have a few companies outperform the others; we like to see performance spread out more evenly.
- The new trend towards Artificial Intelligence (also known as AI) dominated the headlines, as companies invested hundreds of billions of dollars in research and developmen
- We prefer a different index, the S&P 500 Equal Weight Index. This index gives all 500 companies equal weighting for performance and is a much better review of what is truly happening in investors' accounts.
- One report shows that 38 companies focusing on AI are now worth $24 trillion dollars, representing nearly 50% of the total market value of all stocks
2025
- One market indicator at the end of 2024 indicated “extreme optimism”, which typically means the market is overheated a bit, as the market jumped 5% after the election.
- We expect volatility for the year as the impact of tariffs and other factors make economic forecasting more difficult.
- Economic growth will continue to grow at a modest rate.
- Geopolitical events and other factors may bring about corrections and uncertainty.
- In 2025, the U.S. economy will probably move from a government spending economy to a private sector investment economy…and that will surely cause some reactions both good and bad.
- As always, the consumer will hold the key as spending makes up nearly 70% of the economy. Reports show consumer discretionary spending is still near a historic high and tax cuts normally result in continued spending, fueling economic growth.
In summary:
A much more modest year with some volatility mixed in due to uncertainty over tariffs and other geopolitical issues. Consumer spending and continued investments into AI will be watched closely.
In markets like this, dividend stocks tend to outperform, as the cash dividend payments give investors more certainty than aggressive growth stocks. Going back to 1960, compounding growth of reinvested dividends has accounted for 85% of the S&P 500's total return.
Remember markets move to extremes (both up and down) based on greed and fear, and these emotions can change in short order. When markets get overheated it is natural at some point for a correction, which isn’t nearly as much fun as watching our accounts grow but are needed over time. And finally, our economic system and markets are built for long term success, no matter which party is in power.
Please let me know Your2Cents as we move forward and feel free to pass this along to anyone who may be concerned. Thank you for your continued confidence and business.
Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results.