Key takeaways
In 2024, the S&P 500 produced total returns of more than 25%vfor the second year in a row.
10-year Treasury note yields moved higher since the Federal Reserve began cutting short-term interest rates.
Stocks appear well positioned for further gains, though fiscal and monetary policy questions loom on the horizon.
For the second consecutive year, the stock market as measured by the S&P 500 produced total returns exceeding 25%. Investors clearly favored large-cap, U.S. equities. By contrast, bond markets ended the year relatively flat from a total return standpoint. In the closing months of 2024, long-term interest rates trended higher. Rising rates reduced bond values, which detracted from their net return.
In 2024, U.S. equity markets generated positive returns in all but three months. The fourth quarter saw mixed results. In November, the S&P 500 enjoyed its strongest month of the year, but lost ground in October and again in December.
For all of 2024, the S&P 500 generated a 25.02% total return.1 This comes on the heels of 2023’s 26.29% gain.1 A late-year technology stock rally, particularly among some of the S&P 500s’ largest stocks, fueled market momentum. This widened the performance gap between large-cap and mid- to small-cap stocks.2
“Markets are still assessing Federal Reserve (Fed) interest rate policy,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. The Fed cut the short-term federal funds target rate, (which guides rates banks charge each other for overnight loans and tend to influence interest rates on financial products such as mortgages, automobile loans and credit cards) three times in 2024’s final months. However, Fed officials indicated that, for now, it is scaling back projections on the number of 2025 rate cuts. “We need more economic data to get a sense of what the Fed plans to do, and we need more clarity on the new Trump administration’s policy plans,” adds Haworth. “In addition, fourth quarter earnings reports begin to roll out in January, which may also give us a sense of companies’ 2025 earnings expectations.”
Throughout 2024, corporate earnings growth helped boost equity values. Solid economic growth buoyed earnings. Gross Domestic Product (GDP), the key measure of economic growth, expanded at an annualized 3.0% rate in 2024’s second quarter, followed by 3.1% annualized third quarter growth.3 In late January, fourth quarter GDP will be released and is expected to remain positive.
“The economy’s held up reasonably well to this point because of the strong labor market, and consumers’ fairly strong financial position,” says Eric Freedman, chief investment officer for U.S. Bank Asset Management. “On balance, we’re still optimistic about the consumer, particularly among middle- and upper-income consumers.”
“The economy’s held up reasonably well to this point because of the strong labor market, and consumers' fairly strong financial position,” says Eric Freedman, chief investment officer for U.S. Bank Asset Management. “On balance, we’re still optimistic about the consumer, particularly among middle- and upper-income consumers.”
In mid-September 2024, after the Fed’s first interest rate cut occurred, bond market sentiment changed. Yields on the 10-year U.S. Treasury note, which dropped to 3.63%, rose nearly 1%.4 “The recent rise in 10-year Treasury yields reflects expectations of improving economic growth more than anything else,” says Haworth. “The Fed’s decision to slow down rate cuts appears to reaffirm the market’s belief that the economy is in a solid position.”
“Be prepared to take what the capital markets offer given the current environment’s realities,” says Freedman. He advises that long-term investors consider positioning their portfolios with an overweight position in equities relative to fixed income, and a neutral weight invested in real assets. Freedman adds, “It’s critical to have a financial plan that’s tied to the specific goals you hope to achieve.” With a plan in place, you can more readily identify investment strategies that align with your goals.
Notably, says Haworth, investors should consider global diversification. “Although it looks like the U.S. economy remains stronger than those of overseas markets, valuations of non-U.S. stocks are more attractive, so they offer some opportunity as well,” says Haworth.
Based on your goals, timeline and risk appetite, consider these additional portfolio strategies:
Have questions about the economy, markets or your finances? Your U.S. Bank Wealth Management team is here to help.
Note: Tax-loss harvesting does not apply to tax-advantaged accounts such as traditional, Roth and SEP IRAs, 401(k) and 529 plans. Private equity investments provide investors and funds the potential to invest directly into private companies or participate in buyouts of public companies that result in a delisting of the public equity. Investors considering an investment in private equity must be fully aware that these investments are illiquid by nature, typically represent a long-term binding commitment and are not readily marketable. The valuation procedures for these holdings are often subjective in nature. Private debt investments may be either direct or indirect and are subject to significant risks, including the possibility of default, limited liquidity and the infrequent availability of independent credit ratings for private companies. Structured products are subject to market risk and/or principal loss if sold prior to maturity or if the issuer defaults on the security. Investors should request and review copies of Structured Products Pricing Supplements and Prospectuses prior to approving or directing an investment in these securities. Investments in high yield bonds offer the potential for high current income and attractive total return but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer's ability to make principal and interest payments. Derivatives can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on performance. Employing leverage may result in increased volatility. These investments are designed for investors who understand and are willing to accept these risks. Reinsurance allocations made to insurance-linked securities (ILS) are financial instruments whose performance is determined by insurance loss events primarily driven by weather-related and other natural catastrophes (such as hurricanes and earthquakes). These events are typically low-frequency but high-severity occurrences. In exchange for higher potential yields, investors assume the risk of a disaster during the life of their bonds, with their principal used to cover damage caused if the catastrophe is severe enough. The Standard & Poor’s 500 Index (S&P 500) consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The S&P 500 is an unmanaged index of stocks. It is not possible to invest directly in the index. Diversification and asset allocation do not guarantee returns or protect against losses. Past performance is no guarantee of future results.
In the current environment, investors might consider an overweight allocation to equities, reduced positions in fixed income investments and a neutral weighting in real assets. In 2024, equities generated another solid performance year. At the same time, fixed income investments gave back some ground recently, due in large part to continued U.S. economic strength. As always, consult with your wealth management professional to determine the most effective investment strategy aligned with your own goals and risk tolerance.
In 2024, domestic large-cap equities were the capital markets stand out performers. The market’s performance in 2024’s first half was driven by technology-oriented stocks benefiting from investor enthusiasm about developments related to artificial intelligence. In the third quarter, with bond yields declining and the market convinced that Federal Reserve interest rate cuts would soon begin, other sectors such as real estate and utilities began to lead market performance. However, late in the year, large-cap technology stocks regained market leadership. While equity market valuations may appear somewhat elevated given the market’s recent strong returns, analysts remain optimistic about 2025 corporate earnings growth, which could fuel a further stock market upside. However, you may consider dollar-cost averaging to potentially offset some market volatility risk. You also should consider broadening your portfolio to include global diversification, to take advantage of opportunities in other economies.
In the short term, markets are unpredictable, and can experience short-term up-and-down movements. Investors need to position assets designed to meet long-term goals with a willingness to withstand some short-term market movements. In today’s market, stocks have enjoyed two years of significant returns, but not without volatile periods. Bonds lost ground early in 2024 as interest rates moved higher compared to where they stood at the end of 2023, then moved into positive territory for several months. By 2024’s end, bond total returns slipped as yields rose again. Be sure to consult with your financial professional to assess your own risk tolerance level and position your long-term assets accordingly.
By easing monetary policy with interest rate cuts, does the Federal Reserve view the threat of recession as receding?
Declining – yet persistently elevated – prices continue to weigh on consumers and policymakers alike.
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