The late, great Yogi Berra reportedly uttered this phrase after watching Mickey Mantle and Roger Maris repeatedly hit back-to-back home runs for the Yankees in the early 1960s. Last year the stock market also hit back-to-back home runs: a 25% gain in the S&P 500 in 2024 built on its 22% gain in 2023, marking the first back-to-back 20+% gains since the tech bubble of the late ’90s. Once again, stocks trounced other major asset classes with bonds only up 1.3%, public real estate up 8.4%, and private real estate negative for the year.
The underpinnings of the market gains in 2024 were drivers we pointed to early last year – softening inflation, lower rates, and a healthy labor market and consumer. This combination led to strong US GDP growth, estimated at close to 3% on the year, which helped propel corporate earnings up over 9.5%. Although the Fed did not ease as aggressively as anticipated at the beginning of last year (only three rate cuts vs. an expected seven), a more benign Fed, buoyed by easing inflation, lent support to equity valuation multiples and market sentiment.
But even though the “headline” market indexes performed strongly, it was another difficult year for diversification as almost every other sub-asset class including small-caps, international, and value stocks which significantly underperformed the large-cap growth names – again for the second year in a row. It was not necessarily a “bad” year for these sectors with small caps up 6.4%, value stocks up 9.8%, and international stocks up 2.2%, but this paled in comparison to the 35% returns of large-cap growth stocks. And just like in 2023, only a small handful of the very largest tech and communication companies, the so-called Magnificent 7**, drove the lion’s share of the S&P returns last year, accounting for 73% of the market’s return in 2024 and 83% the year before. As we have highlighted previously, this has led to market concentration not seen since The Great Depression. Will the market broaden out in terms of better performance from the other 493 stocks in the S&P 500, or will AI and tech spending continue to grow these already large companies even larger? Nvidia’s market cap is already 15% of the United States GDP, a level not reached even by Cisco (5.5% of GDP) during the Dot Com bubble. One thing we know from history is that trees do not grow to the sky, and that these market concentration cycles tend to mean-revert over time. That does not necessarily mean the AI trend is over, it just means that many of these stocks are discounting increasingly lofty expectations which can be a recipe for downside risk if those expectations are not met.
One of the surprises of the year was that equity valuations, particularly in the large-cap growth segment, continued to expand even in the face of higher long-term interest rates. The ten-year treasury yield went from 3.8% at the beginning of 2024 to end the year at 4.6%, and yet valuation multiples expanded by over 10% throughout the year. This is not typical, as growth stocks are particularly sensitive to higher interest rates. Empirically, we see this play out in the below chart where value stocks tend to perform on par with or better than growth stocks when the 10-year yield sits at 4.0% or higher.
Source: JP Morgan
Whether performance begins to broaden out to other sectors or not, the fundamentals of the economy and market appear strong. Jobs data is relatively robust with expanding job growth accompanied by solid wage gains. Corporate earnings are expected to accelerate to 14% in 2025, which, if attained, would be the fastest in 14 years. Tax policy, along with lower regulations and increased energy production from the new administration, should be tailwinds for corporate earnings. Finally, consumer balance sheets are still relatively healthy and confidence is on the upswing.
Yes, there are risks still lurking. Stickier inflation combined with a fear of intractable government deficits could lead long-term interest rates to spike, deflating increasingly lofty market valuations. Consensus bullishness could also unwind. A year ago, Wall Street analysts had recession odds at almost 50% in the wake of the Fed’s rapid interest rate hikes. This year, it is hard to find even one analyst that has a recession penciled in. Neither of these are the base case, but the risks do need to be acknowledged.
Can the market hit another home run this year? We will certainly take the back-to-back long balls that growth stocks have provided for the market in the past two years, but these home runs are rare and there are plenty of other ways to score runs in investing. What we do know is that sticking to the long-term discipline of patient investing, broad diversification, and ownership in quality businesses are great ways to win the game in the long run.
**The Magnificent 7 include Nvidia, Apple, Microsoft, Alphabet, Amazon, Meta, and Tesla.
Investment Commentary: It’s Déjà Vu All Over Again
By Jonathan McAdams, CFA®
Source: yogiberramuseum.org
The late, great Yogi Berra reportedly uttered this phrase after watching Mickey Mantle and Roger Maris repeatedly hit back-to-back home runs for the Yankees in the early 1960s. Last year the stock market also hit back-to-back home runs: a 25% gain in the S&P 500 in 2024 built on its 22% gain in 2023, marking the first back-to-back 20+% gains since the tech bubble of the late ’90s. Once again, stocks trounced other major asset classes with bonds only up 1.3%, public real estate up 8.4%, and private real estate negative for the year.
The underpinnings of the market gains in 2024 were drivers we pointed to early last year – softening inflation, lower rates, and a healthy labor market and consumer. This combination led to strong US GDP growth, estimated at close to 3% on the year, which helped propel corporate earnings up over 9.5%. Although the Fed did not ease as aggressively as anticipated at the beginning of last year (only three rate cuts vs. an expected seven), a more benign Fed, buoyed by easing inflation, lent support to equity valuation multiples and market sentiment.
But even though the “headline” market indexes performed strongly, it was another difficult year for diversification as almost every other sub-asset class including small-caps, international, and value stocks which significantly underperformed the large-cap growth names – again for the second year in a row. It was not necessarily a “bad” year for these sectors with small caps up 6.4%, value stocks up 9.8%, and international stocks up 2.2%, but this paled in comparison to the 35% returns of large-cap growth stocks. And just like in 2023, only a small handful of the very largest tech and communication companies, the so-called Magnificent 7**, drove the lion’s share of the S&P returns last year, accounting for 73% of the market’s return in 2024 and 83% the year before. As we have highlighted previously, this has led to market concentration not seen since The Great Depression. Will the market broaden out in terms of better performance from the other 493 stocks in the S&P 500, or will AI and tech spending continue to grow these already large companies even larger? Nvidia’s market cap is already 15% of the United States GDP, a level not reached even by Cisco (5.5% of GDP) during the Dot Com bubble. One thing we know from history is that trees do not grow to the sky, and that these market concentration cycles tend to mean-revert over time. That does not necessarily mean the AI trend is over, it just means that many of these stocks are discounting increasingly lofty expectations which can be a recipe for downside risk if those expectations are not met.
One of the surprises of the year was that equity valuations, particularly in the large-cap growth segment, continued to expand even in the face of higher long-term interest rates. The ten-year treasury yield went from 3.8% at the beginning of 2024 to end the year at 4.6%, and yet valuation multiples expanded by over 10% throughout the year. This is not typical, as growth stocks are particularly sensitive to higher interest rates. Empirically, we see this play out in the below chart where value stocks tend to perform on par with or better than growth stocks when the 10-year yield sits at 4.0% or higher.
Whether performance begins to broaden out to other sectors or not, the fundamentals of the economy and market appear strong. Jobs data is relatively robust with expanding job growth accompanied by solid wage gains. Corporate earnings are expected to accelerate to 14% in 2025, which, if attained, would be the fastest in 14 years. Tax policy, along with lower regulations and increased energy production from the new administration, should be tailwinds for corporate earnings. Finally, consumer balance sheets are still relatively healthy and confidence is on the upswing.
Yes, there are risks still lurking. Stickier inflation combined with a fear of intractable government deficits could lead long-term interest rates to spike, deflating increasingly lofty market valuations. Consensus bullishness could also unwind. A year ago, Wall Street analysts had recession odds at almost 50% in the wake of the Fed’s rapid interest rate hikes. This year, it is hard to find even one analyst that has a recession penciled in. Neither of these are the base case, but the risks do need to be acknowledged.
Can the market hit another home run this year? We will certainly take the back-to-back long balls that growth stocks have provided for the market in the past two years, but these home runs are rare and there are plenty of other ways to score runs in investing. What we do know is that sticking to the long-term discipline of patient investing, broad diversification, and ownership in quality businesses are great ways to win the game in the long run.
**The Magnificent 7 include Nvidia, Apple, Microsoft, Alphabet, Amazon, Meta, and Tesla.
Shannon DermodyTEST