**Executive Summary**
The S&P 500 has recorded its best two-year returns in 25 years, with earnings per share expected to grow 9.4% in 2024 and 14.8% in 2025. Despite interest rates still rising, the Fed has been leadership in the latest SEP forecast. The dollar has surged to a two-year high.
**Article**
United States stocks underwent a significant surge in 2024, with major equity benchmarks registering double-digit returns on a positive backdrop of strong economic activity, strong corporate earnings growth, and loose monetary policies from central banks around the world.
The US economy demonstrated robust growth, with GDP increasing by 2.7% year-on-year, while the unemployment rate remained low at 4.1%. Consumer spending rose 3.7%, and inflation edged down to 2.8% year-on-year. The lingering economic recession worries resulting from the interest rate hike cycle were alleviated.
Corporate profits rose in tandem with the economic tide. S&P 500 Index profits are expected to grow 9.4% in 2024 and 14.8% in 2025. Although inflation has not yet reached the Fed’s 2% threshold, its downward trend provided assurance for the FOMC to cut interest rates three times, totaling 100 basis points, at its final three meetings in 2024.
**Performance of Major Indexes**
The Nasdaq (+29.6%), Nasdaq 100 (25.9%), and S&P 500 (+25%) led the performance of major indexes in 2024, driven by the Big Seven (+67.3%). Over the past two years, the S&P 500 has posted a total return of 57.8%, its strongest two-year return in 25 years.
The Nasdaq 100 gained 95.3%, its fifth-highest two-year return since its inception (38 years ago). The seven major indexes also recorded strong returns, with the S&P MidCap 400 (+13.9%) and Russell 2000 (+11.5%) the best performers in the small-cap sector.
**Sector Performance**
Ten of the 11 large-cap sectors ended 2024 higher, with four sectors gaining more than 30%. The best performers were Communications (+40.2%), Technology (36.6%), Financials (+30.5%), and Discretionary (+30.1%).
Ten of the 11 small-cap sectors also gained, with five sectors gaining more than 15%. Technology (+23.6%), Staples (+21.2%), Communications (+19.1%), Industrials (+17.2%), and Financials (+16.6%) were the top performers in the small-cap sector.
**Interest Rates and the Fed**
Interest rates have been on a rollercoaster ride, driven by hawkish and dovish expectations. The Fed cut interest rates by a total of 100 basis points at three meetings in September, November, and December.
The Treasury bond yield rose 63 basis points, from 3.61% to 4.24%, partly due to a significant increase in interest rate volatility. The yield curve steepened, with the 2-year Treasury yield rising 139 basis points, while the 10-year Treasury yield increased 63 basis points.
**FAQs**
Q: What is the outlook for the US economy?
A: The US economy is expected to continue growing, with GDP anticipated to increase by 2.7% year-on-year.
Q: What is the forecast for corporate earnings?
A: Corporate profits are expected to grow 9.4% in 2024 and 14.8% in 2025.
Q: What is the Fed’s stance on interest rates?
A: The Fed has cut interest rates by a total of 100 basis points and has expressed its readiness to maintain loose monetary policies.
Q: Which sectors performed well in 2024?
A: Communications, Technology, Financials, and Discretionary were the top performers in the large-cap sector, while Technology, Staples, Communications, Industrials, and Financials led the small-cap sector.
**Conclusion**
The US stock market experienced a remarkable surge in 2024, driven by strong economic growth, robust corporate earnings, and loose monetary policies from central banks. The Big Seven led the performance of major indexes, while many sectors also recorded significant gains. The Fed has cut interest rates and expressed its readiness to maintain loose monetary policies. Despite some volatility, the outlook for the US economy and corporate earnings remains positive.The Federal Reserve’s recent decisions have sent shockwaves through the financial markets, and expectations of interest rate cuts have been dramatically altered. On one hand, investors have been reacting positively to the news of reduced interest rates, while on the other hand, concerns about the potential risks and uncertainties facing the economy have been heightened. With the unprecedented support from the Fed, coupled with the prospective fallout of an incoming administration, it is clear that we are in a pivotal moment for the U.S. economy.
The Federal Reserve’s Unexpected Actions
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In early November, the Federal Reserve announced a 50 basis-point cut in interest rates, followed by Chairman Powell’s declaration of unwavering support for the economy. The decision to lower interest rates has led to a steep rise in interest rates, a trend that was triggered by the fear of recession insurance. With 128 basis points in cuts over the past four months, interest rates have reached all-time highs, and investors’ expectations for further increases are on the rise.
Chairman Powell’s Comments on the Federal Open Market Committee (FOMC)
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The Federal Reserve’s quarterly SEP forecast (December) revealed a shift towards a more hawkish stance, citing inflation concerns and the disparities in the workforce. Powell further emphasized the impact of the incoming President’s policies on inflation, reassuring that there should be balance. The forecast noted that the incoming administration could lead to increased inflation and possibly further economic growth.
The Hearing of December FOMC
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Market outcomes responded quickly, as stocks plummeted in December, and many sectors experienced losses. The one sector that stood strong during this time was the Seven Major Index, with a gain of 6.3% in the December.
Conclusion of the Upcoming Year
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According to FactSet, the quarterly profits of S&P 500 companies were reported to have increased by 5.9% on a year-over-year basis, which marks a fifth straight year of growth. It is anticipated that, in the fourth quarter of this year, profits of $109.9 billion would grow by 11.9%. Meanwhile, profits in 2025 are forecasted to be 9.4% higher, with revenue expanding by 5.1%.
Caution is unavoidable, however, as there will be significant uncertainties that have the potential to cause heightened volatility. These incorporate questions about the President’s plans on tariffs, tax programs, immigration deregulations, policymaking, and fiscal expenses. In addition to this, the 100-basis-point cut has not caused interest rates to come down significantly. With mortgage rates averaging above 7%, there is now a concern about lingering economic challenges domestic and international.
Natural Factors endanger Economy in 2025
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Concerns regarding potential interest rate hikes and the dollar are enlarging. As recently as last week, the U.S dollar index has hit a two-year high.
