2024 Recap and Observations
Summary
2024 was a strong year for U.S. stocks, especially large growth stocks. The biggest eight stocks in the S&P 500 were responsible for 60% of the index’s total return for the year! Foreign stocks from both developed and emerging economies delivered positive, albeit modest, returns.
Longer-term interest rates rose, despite three cuts by the Federal Reserve, putting pressure on bond returns. High-quality bond returns were slightly positive for the year and 30-year fixed mortgage rates
Planning opportunities for 2025 include taking advantage of increased contribution limits, preparing for potential changes in tax policy, and revisiting investment risks - intended or otherwise - in your portfolio.
Recap
Investors concentrated in big U.S. growth companies – or crypto – likely celebrated 2024 performance. And those with a more diversified approach, while still earning decent returns, were probably less enthused. Here is a brief recap.
Stocks and bonds: U.S. stocks had another good year, led by big growth companies. Once all the dust settles, earnings for the S&P 500 are expected to rise nearly 10% year-over-year in 2024, revenues by about 5%, but the index returned 25%. Foreign stocks from developed markets were disappointing, at least measured against their domestic alternatives, but still managed to earn about 5%. Prices of high quality bonds fell during the year, but those losses were offset by higher yields which helped those high quality bonds eek out slightly positive total returns of 1.3%.
Balanced portfolios: In years like 2024, when the S&P 500 is among the best performers, diversification can feel particularly misguided. Especially with the benefit of hindsight. It is fair to say few saw these strong stock returns coming in advance. Both examples of balanced portfolios below have about 60% invested in stocks and 40% in bonds and cash. Diversifying away from large U.S. stocks weighed on performance.
US Balanced Portfolio up 14.6%
Global Balanced Portfolio up 6.8%
Interest rates: The Federal Reserve cut their target rate three times last year, by a total of 1%, but longer rates moved higher. The 10-year Treasury yield rose from 3.88% at the end of 2023 to 4.62% at the end of 2024. Average 30-year fixed mortgage rates rose from 6.6% and finished the year at 6.9% . The dollar rose by about 8% (nominal Broad US Dollar Index), which put additional pressure on foreign investment returns for U.S. investors.
Click here to see a 2024 summary
(Source: Divvi Wealth Management, Morningstar Direct. 10- and 20-year returns are annualized. Max drawdown represents the peak to trough performance for each respective index during those periods.)
How does that compare to expectations?
Stocks: The median forecast for the S&P 500, from about a dozen Wall Street strategists, was 4,775. Only four of the strategists predicted 5% returns or better. The S&P 500 ended the year at 5,881.63, up over 23% before dividends.
Rates: The Fed was expected to cut rates six times. We only got three cuts, mentioned above. Investors thought the odds rates would be lower than where they ended were about 6-to-1.
Consistently making accurate short-term predictions about the market or economy is incredibly difficult! Keep that in mind any time you hear “what’s in store” for 2025.
Other observations
Crypto soared. Funds in Morningstar’s Digital Assets category returned an average of 58% in 2024. Prices really jumped after President Trump we elected. His administration is expected to be friendlier to the crypto world.
AI went further mainstream. NVIDIA is becoming a household name. But AI investment stretched beyond familiar technology names. Data centers and the companies that power them, for example, are expected to reap long-term rewards as AI applications grow in adoption and importance.
U.S. exceptionalism. Our economy is expected to grow faster than most other developed economies and is home to a disproportionate number of the world’s most important businesses. That is unlikely to change any time soon. S&P 500 earnings are expected to grow by nearly 15% in 2025.
Indexes are being driven by a small number of gigantic businesses. Over the last two years, the S&P 500 has retuned 58%. Companies in the index are weighted by size, so the biggest companies make up the lion’s share of the index. The top eight companies – Apple, NVIDIA, Microsoft, Amazon.com, Meta (Facebook’s parent), Alphabet (Google’s parent), Tesla, and Broadcom – account for 36% of the index. The other 496 businesses make up the rest. The smallest 400 companies in the S&P 500 barely account for 25% of the index. This has been great for investors in those stocks or the index in general. During 2023 and 2024, Microsoft returned 33% per year. And it has been the worst of the bunch! In 2024 alone, those eight companies were responsible for 60% of the S&P 500’s 25% return. Excluding those eight stocks, the rest of the index returned just 10% for the year.
One alternative way to weight the index is to split it evenly across all companies, referred to as an “equal-weighted” index. It owns exactly the same stocks, but each company represents about 0.2% of the index. Those eight companies I just listed barely account for 1.5% of this index. How has that influence performance? The S&P 500 equal weighted index has returned just 29% since the beginning of 2023, nearly 30% less than the market cap weighted index. The impact of these top stocks to the overall return of the index has been massive.
It’s a great time to be a Kansas City sports fan. The Royals were back in the playoffs. KC Current fans packed CPKC, the country’s first stadium built for a women’s professional sports team. And the Chiefs are heading into the playoffs with the top seed in the AFC.
Keep a long-term view
Macrobond recently shared this chart and it shows calendar year returns for the S&P 500 by various return buckets. I like this chart. The far-left column shows every calendar year in which the index lost between 40% and 50%, which only happened once, in 1931. The far-right column shows calendar years in which the index rose between 40% and 50%, which happened three times. The other return buckets are in between. 2024 is in the 20% to 30% bucket, which makes 2024 far from an outlier. The only return bucket that happened with greater frequency is 10% to 20%.
Source: Macrobond
Owning stocks should be considered a long-term game. A single calendar year is hardly long-term, at least when it comes to investing. The S&P 500 has lost at least 10% on 20 different occasions. Bad years happen. Focusing on one-year returns, especially for stock investors, doesn’t make much sense, though.
How would this chart look if we focused on long-term periods? I updated the data from the chart, with the following adjustments.
Look at 10-year and 20-year returns, not calendar years.
To increase our sample size, I used quarterly data instead of annual data.
You can see the results by clicking on the links below. The first link shows 10-year returns, and the second table shows 20-year returns. All returns are cumulative. The quarter and date represent the end of that period. For example, in the top left corner of the first table, you should see Q4 2008 in dark brown. That represents the 10-year period ending December 2008.
Admittedly, the charts aren’t the easiest to read unless you love tiny print. So, here is a summary of the data:
10-year total returns:
100% or better 80% of the time.
200% or better 51% of the time.
300% or better 28% of the time.
Negative just 3% of the time.
20-year total returns:
Have never been negative.
200% or better 99% of the time.
300% or better 90% of the time.
500% or better about 2/3 of the time.
1,000% or better 1/3 of the time.
Just know those big 20-year returns don’t happen in a straight line. To realize those gains, investors had to suffer short-term pain. During every single 20-year period since the 1930s, the S&P 500 has fallen by at least 23% at one point or another. Experiencing a loss of 40% or more, when looking at 20-year holding periods, is not unusual. If your plan includes owning stocks for the long-run, we should be prepared to see the value fall by a third at some point or another. It comes with the territory.
5 for 2025
Here are five final thoughts as we move into 2025.
Get the big stuff right
For those still building wealth, remember it’s a long game. Keep it simple. Doing these three things should make 2025 a successful year, regardless of what the markets do.
Spend less than you earn. Building wealth is nearly impossible when your income is gone at the end of every month.
Pay yourself first. Automate whenever possible. Treat investing in your future as your most important monthly expense. Whether it be a company retirement plan, an IRA, a brokerage account, or something else, pay yourself first.
Invest for long-term growth. Inflation is one of the biggest risks we face over time. Consequently, one of the primary reasons we invest in stocks is to protect and grow our ability to consume. Said more plainly, we want to protect our quality of life. History strongly suggests owning businesses via the stock market over long periods of time will grow our real wealth. Since 1926:
Cash lost real value (i.e. had returns lower than inflation) in 35% of all 20-year periods.
Bonds lost real value in 43% of all 20-year periods. Stocks never lost real value in any 20-year period.
Stocks also protect real wealth better than bonds and cash in 91% of those 20-year periods.
Updated contribution limits
New IRS contribution limits for some retirement accounts are listed below. Click or tap to enlarge.
For those with high deductible health plans (HDHPs), don’t forget about HSAs. The limits for individuals and families increased to $4,150 and $8,300, respectively. Those age 55 and older are eligible for an additional $1,000 catch-up contributions.
Tax laws are likely to change in 2026
The Tax Cuts and Jobs Act (TCJA) went into effect in 2018. Many of the provisions are scheduled to sunset at the end of 2025, including:
lower ordinary income tax rates,
bigger standard deductions,
a cap on the state and local tax (SALT) deduction, and
bigger estate tax exemptions.
It is impossible to know exactly how these issues will be addressed by politicians later this year, but we can start planning now. Reach out to our team if you would like to discuss more.
U.S. stock valuations are higher than historical norms
There are plenty of metrics to help us guesstimate if the market is cheap or expensive. One is price-to-earnings, or P/E, ratios. We will use it as an example. The numerator is the price of the S&P 500. The denominator is combined earnings from companies within the S&P 500. The index ended 2024 at 5,882, and expected earnings are about $274. That makes the P/E ratio about 21.5, and the average over the last 30 years is 16.9. (Source: JPMorgan). This would indicate stocks are more expensive than their recent history.
On one hand, don’t sweat it. At least not when looking at the next 12 months. This chart from JPMorgan shows the relationship between P/E ratios and 1-year returns is weak at best. P/E ratios essentially tell us nothing about how stocks will perform over the next year.
You have probably heard the old saying, “You get what you pay for.” Stocks are similar. Higher quality businesses typically command higher valuations. I would expect to pay more to buy a highly profitable business that is growing faster than its peers compared to one that isn’t. That makes perfect sense to me. And profitability – one measure of quality – of the index has improved quite a bit over the last 20 years. Two common indicators of profitability are profit margins and returns on assets. Both have risen significantly over the last 20 years, which could justify today’s higher valuations.
On the other hand, higher P/E multiples could indicate investors are “overpaying” for earnings. Expectations may be too rosy. If that is the case, we should plan for subpar returns going forward.
Don’t throw in the towel on diversification quite yet
Since 1950, calendar year returns for the S&P 500 have ranged from up 52% to down 37%. I doubt anyone would mind the up 52%, but the thought of watching the value of investments fall by over a third is more than some can tolerate. Diversifying assets can help smooth the ride and limit downside risks.
Yes, 2024 was another lackluster year for investors in high quality bonds. But yields are, in most cases, much higher than years past. Another chart from JPMorgan compares current bond yields to the last 10 years. For high income investors and those in high tax brackets , municipal bonds are offering tax-equivalent yields over 6%, and that is before state taxes are considered. One of the main reasons investors own bonds is to diversify and bring down the volatility of their investment portfolios.
Other asset classes and investments have a history of producing differentiated returns from the stock market. These could be particularly important for retirees or pre-retirees who intend to use their investments to provide income during retirement. Again, please reach out to our team if you would like to discuss some of these options and how they might impact your financial plan.
Here's to a happy and health New Year!
The Divvi Wealth Team
Sources and footnotes:
High quality bonds represented by the Bloomberg US Aggregate Bond Index
US Balanced Portfolio represented by Vanguard Balanced Index Fund Admiral Shares
Global Balanced Portfolio represented by American Funds Global Balanced Fund F2 Shares
Data source for market data since 1926 is Morningstar Direct
Cash proxy: Ibbotson® SBBI® US (30-Day) Treasury Bills
Bonds proxy: Ibbotson® SBBI® US Long-term (20-Year) Government Bond Total Return
Stocks proxy: Ibbotson® SBBI ® US Large-Cap Stocks Total Return
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