In the 1990s, the Chicago Bulls achieved a remarkable feat, winning three straight NBA championships – twice. During both “three-peats”, their third year was the toughest, yielding the fewest regular-season wins. Similarly, the U.S. stock market is coming off two consecutive gigantic years of returns, with the S&P 500 surging 26% in 2023 and another 25% in 2024. While we anticipate another positive year in 2025, we believe it will be the most challenging and lowest-returning year of this “three-peat”. Please refer to the chart below which shows year by year S&P 500 performance going back 75 years. You’ll note there are not many consecutive three-year periods with strongly positive results. Returns in 2025 will not be linear or smooth, but in the end, it should be another “championship” for the stock market.
Looking back on 2024, we are surprised by the U.S. economy and its resiliency in the face of higher interest rates and global tension. By extension, we are equally astounded by the strong performance of U.S. stocks. Coming into 2024, it was a consensus opinion that a recession was imminent. However, the combination of a strong labor market, robust corporate earnings, falling inflation, and efficiencies from artificial intelligence kept a recession at bay.
2024 closely mirrored 2023 in the U.S. stock market. Once again, stocks outperformed bonds, domestic stocks bested foreign, large capitalization stocks outdid small capitalization, growth beat value, and the technology-heavy Nasdaq surpassed the S&P 500. The best-performing sectors within the S&P 500 were communication services and financials while the weakest were materials, real estate, and energy. Our portfolios were well-positioned to benefit from these trends. While we underestimated the strength of the U.S. economy, we had our emphasis in the right places. Notably, we were over-weighted (relative to the S&P 500) to two of the top five best-performing stocks in the entire S&P 500 for 2024 – Nvidia and Palantir.
The Federal Reserve began lowering interest rates in late September. Since then, short-term interest rates have declined by 1.00%. Ironically, the 10-year Treasury yield has increased by 0.90% over the same period. This divergence between the Fed’s actions and the bond market’s reaction suggests a lack of consensus on the economic outlook. The bond market’s behavior seems to indicate expectations of either robust future growth (unlikely) or persistent, stubborn inflation.
We interpret the increase in 10-year bond yields as a signal of expected future inflation (think tariffs and the U.S. deficit and debt load), at least in the short term. A 10-year Treasury around 5% could have a negative short-term impact on the stock market. That said, equity markets can do just fine in a higher interest rate environment (think back to the 1990s), though there will undoubtedly be a digestion period. The recent strength in the U.S. dollar is also somewhat concerning, as it can negatively impact trade and some multinational companies.
With the presidential election now behind us, we can get back to focusing on fundamentals and things that matter. We strongly maintain that the rally in the U.S. markets since the election is not because of who won, but because we declared a quick, decisive winner. Markets hate uncertainty, and now we have a clearer path forward and can plan accordingly for the next four years. There is some optimism for deregulation and corporate tax cuts, but who knows how long that will take and how deep the cuts will be, if at all? And, by the way, how are we going to pay for those cuts? There is also concern about sweeping tariffs and how they might affect pricing, inflation, and competition. However, we do not believe tariffs will be sweeping and broad, but rather targeted to certain goods from specific countries, just as they were during President Trump’s first term.
As we look toward 2025, we do not foresee the need for major shifts in portfolio strategies. The U.S. consumer remains employed and financially sturdy, supported by a labor market cushioned by eight million unfilled job openings. We are cognizant of stock valuations, but valuation alone is not a proven market timing strategy. Expectations for corporate profits are undoubtedly high, with double-digit year-over-year growth projected in 2025 compared to 2024. Historically when double-digit profit growth comes to fruition, the market flies high. However, given the market’s recent run, we believe some of this performance has been realized already. As long as consumers keep their jobs and companies keep turning out profits, the market should be fine, but most likely not soar. If either of those changes, there will be stock market hiccups.
Our macro strategy of seeking the right blend of asset classes (large-cap stocks, small-cap stocks, domestic, foreign) along with high-quality stocks and bonds will not change. Quality, in fact, was the second biggest factor in stock performance during 2024, trailing only momentum, and outpacing value and yield (dividends). We will maintain our overweight positions in the technology and healthcare sectors. Technology was once again a stellar performer in 2024, while healthcare was not. However, we submit that the healthcare sector might be the biggest benefactor of artificial intelligence and therefore look forward to better performance in 2025 notwithstanding the political pressure being applied.
With stocks appreciating over the past two years, without rebalancing, some may be overweight equities. We will ensure that we are aligned with our asset allocation targets. This might mean taking profits on stocks, paying some capital gain tax, and buying bonds. With the increase in bond yields, we are not afraid to purchase high-quality debt to maintain our long-term plans.
This month, Trifecta Capital Advisors celebrates its three-year anniversary. We are humbled and grateful for the support you have shown us. We remain committed to providing the great customer experience and accessibility that we promised. Hopefully the markets continue to cooperate as well and can achieve its own “three-peat” of positive returns.
Insights
Quarterly Review: Q4 2024
In the 1990s, the Chicago Bulls achieved a remarkable feat, winning three straight NBA championships – twice. During both “three-peats”, their third year was the toughest, yielding the fewest regular-season wins. Similarly, the U.S. stock market is coming off two consecutive gigantic years of returns, with the S&P 500 surging 26% in 2023 and another 25% in 2024. While we anticipate another positive year in 2025, we believe it will be the most challenging and lowest-returning year of this “three-peat”. Please refer to the chart below which shows year by year S&P 500 performance going back 75 years. You’ll note there are not many consecutive three-year periods with strongly positive results. Returns in 2025 will not be linear or smooth, but in the end, it should be another “championship” for the stock market.
Looking back on 2024, we are surprised by the U.S. economy and its resiliency in the face of higher interest rates and global tension. By extension, we are equally astounded by the strong performance of U.S. stocks. Coming into 2024, it was a consensus opinion that a recession was imminent. However, the combination of a strong labor market, robust corporate earnings, falling inflation, and efficiencies from artificial intelligence kept a recession at bay.
2024 closely mirrored 2023 in the U.S. stock market. Once again, stocks outperformed bonds, domestic stocks bested foreign, large capitalization stocks outdid small capitalization, growth beat value, and the technology-heavy Nasdaq surpassed the S&P 500. The best-performing sectors within the S&P 500 were communication services and financials while the weakest were materials, real estate, and energy. Our portfolios were well-positioned to benefit from these trends. While we underestimated the strength of the U.S. economy, we had our emphasis in the right places. Notably, we were over-weighted (relative to the S&P 500) to two of the top five best-performing stocks in the entire S&P 500 for 2024 – Nvidia and Palantir.
The Federal Reserve began lowering interest rates in late September. Since then, short-term interest rates have declined by 1.00%. Ironically, the 10-year Treasury yield has increased by 0.90% over the same period. This divergence between the Fed’s actions and the bond market’s reaction suggests a lack of consensus on the economic outlook. The bond market’s behavior seems to indicate expectations of either robust future growth (unlikely) or persistent, stubborn inflation.
We interpret the increase in 10-year bond yields as a signal of expected future inflation (think tariffs and the U.S. deficit and debt load), at least in the short term. A 10-year Treasury around 5% could have a negative short-term impact on the stock market. That said, equity markets can do just fine in a higher interest rate environment (think back to the 1990s), though there will undoubtedly be a digestion period. The recent strength in the U.S. dollar is also somewhat concerning, as it can negatively impact trade and some multinational companies.
With the presidential election now behind us, we can get back to focusing on fundamentals and things that matter. We strongly maintain that the rally in the U.S. markets since the election is not because of who won, but because we declared a quick, decisive winner. Markets hate uncertainty, and now we have a clearer path forward and can plan accordingly for the next four years. There is some optimism for deregulation and corporate tax cuts, but who knows how long that will take and how deep the cuts will be, if at all? And, by the way, how are we going to pay for those cuts? There is also concern about sweeping tariffs and how they might affect pricing, inflation, and competition. However, we do not believe tariffs will be sweeping and broad, but rather targeted to certain goods from specific countries, just as they were during President Trump’s first term.
As we look toward 2025, we do not foresee the need for major shifts in portfolio strategies. The U.S. consumer remains employed and financially sturdy, supported by a labor market cushioned by eight million unfilled job openings. We are cognizant of stock valuations, but valuation alone is not a proven market timing strategy. Expectations for corporate profits are undoubtedly high, with double-digit year-over-year growth projected in 2025 compared to 2024. Historically when double-digit profit growth comes to fruition, the market flies high. However, given the market’s recent run, we believe some of this performance has been realized already. As long as consumers keep their jobs and companies keep turning out profits, the market should be fine, but most likely not soar. If either of those changes, there will be stock market hiccups.
Our macro strategy of seeking the right blend of asset classes (large-cap stocks, small-cap stocks, domestic, foreign) along with high-quality stocks and bonds will not change. Quality, in fact, was the second biggest factor in stock performance during 2024, trailing only momentum, and outpacing value and yield (dividends). We will maintain our overweight positions in the technology and healthcare sectors. Technology was once again a stellar performer in 2024, while healthcare was not. However, we submit that the healthcare sector might be the biggest benefactor of artificial intelligence and therefore look forward to better performance in 2025 notwithstanding the political pressure being applied.
With stocks appreciating over the past two years, without rebalancing, some may be overweight equities. We will ensure that we are aligned with our asset allocation targets. This might mean taking profits on stocks, paying some capital gain tax, and buying bonds. With the increase in bond yields, we are not afraid to purchase high-quality debt to maintain our long-term plans.
This month, Trifecta Capital Advisors celebrates its three-year anniversary. We are humbled and grateful for the support you have shown us. We remain committed to providing the great customer experience and accessibility that we promised. Hopefully the markets continue to cooperate as well and can achieve its own “three-peat” of positive returns.