Aldrich Wealth’s Nicole Rice, Partner + Chief Growth Officer, and Darin Richards, Partner + Chief Investment Officer, provide quarterly market commentary and projections, offering a deeper dive into market performance from the last quarter of 2024 and insights on what to anticipate in 2025.

The S&P 500 gained 2.4% during the fourth quarter of 2024, with just four of the 11 underlying sectors rising. Inflation data aligned with expectations, though proved to be sticky. Still, the Federal Reserve (Fed) cut interest rates twice during the quarter. The economy continued to grow in Q4 thanks to consumer spending, and employment remained robust. International markets trailed their domestic counterparts during the quarter, with the MSCI EAFE losing 8.1%, mainly driven by the rising value of the US dollar. The European Central Bank (ECB) cut interest rates two more times but noted caution going forward as inflation remained higher than hoped. In Japan, the yen weakened despite Tokyo-area inflation rising. Emerging markets, as measured by the MSCI Emerging Markets Index, fell 8% in the quarter. In China, stimulus efforts proved underwhelming and consumer spending continued to lag pre-pandemic levels, while Taiwan gained on robust growth and demand for semiconductors. As yields rebounded throughout the quarter, bond returns fell, with the Bloomberg US Universal Index down 2.7%. Looking ahead, inflation and interest rates are likely to influence the broader markets.

The S&P 500 rose 2.4% during the fourth quarter of 2024, with November providing the only monthly gain. The S&P closed out 2024 up 25%, marking the index’s first back-to-back years of over 20% gains since the late 1990s. The quarter unfolded amid mixed economic data as October showed the weakest jobs creation since late 2020, but the unemployment rate stayed near expectations. In December, US economic output hit the highest level in almost three years. Inflation was mostly consistent with expectations throughout the quarter but was stickier than anticipated. The Fed cut interest rates by 25 basis points (bps) in November and December. During the December meeting, Fed officials reduced expectations from 100 bps (four cuts) to 50 bps (two cuts) of cuts in 2025, noting that the country’s economic growth is allowing policymakers to take their time in deciding how quickly to decrease rates. Following the Fed’s commentary, the Volatility Index spiked over 40% and consumer confidence experienced the largest monthly decline since November 2020.

Just four of the 11 underlying sectors of the S&P 500 rose in Q4. Consumer discretionary was the top performer, gaining 14.3% on the heels of Tesla and Amazon. Conversely, materials was the worst performer of the quarter, losing 12.4% largely due to global economic slowdowns and relatively high interest rates.

After bucking the past years’ trends in Q3, markets reverted to recent history. Large cap stocks bested small cap stocks and growth stocks continued to dominate value stocks.

International developed markets, as measured by the MSCI EAFE Index, fell 8.1% during the quarter, primarily due to the rising value of the dollar. The EAFE Index was down only 0.6% in local currency. In the eurozone, business activity remained in contractionary territory as new orders continued to dwindle. Although inflation accelerated slightly throughout the quarter, underlying data eased, allowing the ECB to cut rates by 25 bps in both October and December. During the December meeting, ECB officials noted caution going forward but left the door open to ease monetary policy further in 2025.

The picture was less rosy in the United Kingdom (UK). Consumer confidence fell to the lowest level of the year during the quarter, and consumer demand remained soft. Business activity slowed, and the economy unexpectedly contracted as production output weakened. Alternatively, UK mortgage approvals for home purchases (an indicator of future borrowing) rose to the highest level since August 2022 during the fourth quarter.

In Japan, the Tokyo-area Consumer Price Index (CPI), viewed as a leading indicator of nationwide inflation, rose above consensus estimates throughout the quarter. Still, the yen weakened, and wages declined as the new prime minister cautioned that the economy is not ready for an additional hike.

Elsewhere, the MSCI Emerging Markets Index lost 8% in Q4 after three months of losses, worsened by the rising value of the dollar. In China, the largest constituent of the index, officials continued efforts to prop up the economy throughout the quarter. The People’s Bank of China (PBOC) injected cash into the economy, and banks lowered lending rates, but stimulus was underwhelming and had little impact. Consumer spending continued to lag pre-pandemic levels, and youth unemployment remained high as inflation data released throughout the quarter showed the economy remains stuck in deflation. Later in the quarter, economic data began to improve, as home prices rose, exports expanded for the eighth straight month, and policy makers pledged to employ a “more proactive” fiscal policy and to loosen monetary policy in 2025. Alternatively, Taiwan was the only country of the index to post a gain in the quarter, rising 3.3% thanks to robust growth and demand for semiconductors and other AI electronics.

Over the fourth quarter, the Bloomberg US Aggregate Index fell 3.1% and the broader Bloomberg US Universal Index declined 2.7% as yields rose on the resilient economy and concerns over future inflation expectations. The quarter wiped out more than half of the indexes’ gains through the first nine months of the year.

The yield on the 10-year US treasury rose 0.84% during the quarter, ending at 4.58%. Short-duration yields, which are typically closely tied to Fed rate moves, also rose despite the Fed’s rate-cutting campaign. The 2-year treasury increased 0.64% and the yield curve continued to normalize further after the two-and-a-half-year inversion ended at the end of Q3. High-yield and floating-rate bonds posted the best performance as default risks remained low.

US gross domestic product (GDP) grew at an annualized rate of 3.1% over the third quarter of 2024, the latest period for which data are available. The US economy expanded largely thanks to increases in consumer spending, exports, and business investment. In December, US economic output hit the highest level in nearly three years, portending strong Q4 GDP growth.

Employment data published throughout the fourth quarter painted a blurry picture of labor market strength. October marked the weakest number of job openings since late 2020, adding just 12,000 jobs compared to the 100,000 expected. Despite this downturn, the unemployment rate remained low throughout the following months. Later in the quarter, however, job growth rebounded, rising more than expected. Additionally, inflation-adjusted wages increased over the same period.

The Fed continued its rate-cutting campaign throughout Q4, and although inflation data largely aligned with expectations, underlying metrics raised concerns that the fight against inflation may not yet be over. Throughout the fourth quarter, CPI, a measure of goods and services prices, came in near expectations but ticked up each month. Although energy prices declined, food prices spiked, and shelter costs continued to trend upward. Additionally, the Producer Price Index (PPI), a measure of wholesale prices, rose higher than anticipated in both October and November. Consumer spending remained robust in Q4, contributing to demand-driven inflationary pressure. Further, services sector activity accelerated in December, causing input prices to surge near a two-year high. Fed officials indicated they are comfortable with where rates are now, but reduced interest rate cut expectations for 2025.

Arguably, the Fed may have been able to thread the needle between lowering inflation and maintaining economic stability. Coming off the highest interest rates in nearly 20 years, the US economy continued to expand throughout the year. After coming down earlier in the year, yields spiked again at the end of 2024. Looking to 2025, rising interest rates would be a headwind for stocks, particularly value and small cap stocks. However, lower rates could significantly benefit these groups, reversing course from large cap growth’s dominance. US large cap equity valuations are well above average and the momentum is expected to continue. The S&P is projected to have 15% earnings growth in 2025, and companies outside of the largest few are expected to participate after struggling in 2024. Still, it seems unlikely that large cap stocks will be able to sustain strong returns for another year. If sentiment shifts away from 2024’s winners, areas of the market that have lagged will offer more compelling opportunities.

Developed international stocks are attractively priced, but the dollar’s continued strength has been a headwind to a recovery. Lower interest rates or dollar weakness could unlock significant value overseas. Developed international stocks are trading at the largest discounts to US stocks in over 20 years, and growth is improving, but growth in Europe and Japan is expected to lag the US in 2025. The ECB is likely to continue cutting interest rates, while the Fed may move more slowly. If this is the case, the euro may weaken further against the dollar.

Despite the down quarter, emerging market stocks have started to stabilize. GDP growth of emerging countries is expected to exceed that of the US, and investors have begun to move back into the region as the forward-looking outlook has improved. India is projected to have the fastest growth, Chinese officials have pledged more accommodative monetary and fiscal policy, though a rally may not be accomplished unless the stimulus is substantial. Additionally, President-elect Trump’s policies, particularly tariffs, could spell geopolitical tensions and less trade, if enacted fully.

The yield curve normalized throughout the end of 2024. Short-term bond yields seemed to have peaked earlier in the year, but longer-term yields spiked again in Q4. If the Fed continues to cut interest rates in 2025 and yields trend downward, future bond returns look relatively attractive. Even a passive Fed could usher in attractive returns as starting yields are relatively high. However, Trump’s policies are likely to be inflationary and the Fed may have to delay its rate-cutting campaign. Credit spreads are tight, but defaults remain low, and yields are attractive compared to historical levels. Barring an increase in defaults, credit sectors look attractive.

This information is for educational purposes and is the opinion of Aldrich Wealth LP (Aldrich Wealth). Facts and figures are believed to be from reliable sources, but no liability is accepted for any inaccuracies. Indices are unmanaged, unavailable for direct investment, and do not include any transaction, management or other fees or costs. Nothing in this commentary should be construed as an investment recommendation. Past performance does not guarantee future results and all investments involve risk. Aldrich Wealth is an investment adviser registered with the US Securities and Exchange Commission.