2024: A Year of Remarkable Market Performance

2024 was a remarkable year for the markets. The S&P 500 capped off the year with an impressive gain of over 23%, following a similar performance of 24% in 2023. This marked the first time since the late 1990s that the index achieved consecutive annual gains exceeding 20%. Even on the surface, this level of market performance is worth noting—but the details tell a more complex story.

The Dominance of the “Magnificent Seven”

While the headline numbers for the S&P 500 captured attention, this performance wasn’t broadly shared across the market. Much of the growth was driven by a select group of companies—what has been termed the “Magnificent 7.” 

These seven technology giants—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—saw extraordinary returns. Here are some stats to contextualize their performance:

• The average stock in the Mag 7 was up over 60% last year, nearly three times the performance of the broader market.
• The group was responsible for over half of the S&P 500’s 2024 return.
• The group’s collective market value, totaling over $17 trillion, now represents approximately 30% of the S&P 500 and nearly 60% of the entire U.S. GDP.
• If you include 2023 returns, the relative performance of the Mag 7 is even more staggering. Since 2022, the average Mag 7 stock is up nearly 270% compared to 53% for the S&P 500!

While the stellar returns of these companies have been well publicized and garnered a lot of media attention, it’s important to recognize what’s actually driving this performance.

The dominance of these companies isn’t just driven by hype – it reflects their unique earnings performance in 2024 and rising expectations for future earnings growth.

Earnings for the Mag 7 in 2024 are expected to be nearly 50% higher on average than in 2023 (we’re still waiting on Q4 results). Meanwhile, earnings for the equal-weighted S&P 500 index, which is more representative of the average stock, are expected to be essentially flat. 

Expectations for future earnings growth among these tech giants have also been climbing. Projections for the Mag 7's earnings for 2025 rose by nearly 20% on average. In contrast, the consensus for 2025 earnings of the equal-weighted index actually dropped by 2% over the same period.

The disparity in earnings performance should not come as surprise. To curb inflation, the Federal Reserve has pushed  monetary policy into "restrictive territory" to deliberately slow economic growth. Unsurprisingly, many companies find it challenging to grow profits under these conditions, as they grapple with rising costs, increased interest rates, and softer consumer demand.

Meanwhile, the constituents of the Mag 7 have been far more immune to these economic forces. These firms have capitalized on powerful secular trends, such as demand for AI investment, which have overwhelmed monetary policy in driving their profits. These high quality businesses are also benefiting from strong pricing power, clean balance sheets, and effective cost cutting efforts, which have made their earnings far more resilient than the average company.  

The Role of Rates in 2024’s Market Dynamics

Another central theme of 2024 was the Federal Reserve’s monetary policy shift. For most of the year, the Fed maintained a restrictive stance to curb inflation. However, 18 months after they began raising rates, we saw the Fed begin an easing cycle in September. In total, the Fed enacted three rate cuts totaling 100 basis points by year-end. The cuts provided critical relief and led to a change in sentiment, which contributed to the equity market’s robust performance.

Interestingly, much of the market’s positive response occurred leading into the rate cuts. As inflation slowed over the first half of the year, investors anticipated that monetary easing would create tailwinds for growth. In fact, nearly 80% of the S&P 500’s return for the year came before the first rate cut. We’ve seen similar dynamics in previous rate-cutting cycles, where investors “buy the news and sell the rumor”.

Towards the end of the year, on the heels of the election of President Trump, resilient economic data, and stalling inflation progress, we saw long-term rates move up again. This slowed broader market momentum and exacerbated market concentration as investors again flocked to large, quality companies they felt confident could grow earnings without help from the Fed.  

Is The Market Too Expensive Now?

At the end of 2024, the S&P 500 valuation sat at 22x P/E, up from 19x at the end of 2023, and well above the 20-year average multiple of 16x.

However, much of this “multiple expansion” has been driven by an increase in valuations of a select few large-cap stocks, as investors are happy to pay up for companies that can grow profits regardless of where we are in the economic cycle.

In contrast, valuations for the broader market remain anchored. The equal-weighted S&P 500 index, which gives all companies equal importance regardless of size, has seen its valuations stay stable over the past year at approximately 17 to 18 earnings. 

It’s also important to note that comparing current valuations of the S&P 500 to historical averages can be misleading. The index today looks different than it did in the past. Twenty years ago, the largest constituents of the S&P 500 were energy, financial and pharmaceutical companies–these companies carried more debt, had lower margins, and grew at a much slower pace than the large tech companies that make up the largest portion of the index today. Despite the same name, what you’re getting today when you buy the S&P 500 is very different from what you got in the past! It’s much higher quality, and investors are willing to pay more for it.

We don't anticipate valuations to continue climbing from this point but believe the downside to valuations could also be limited if interest rates drop further. This is due to the inverse relationship between valuations and interest rates—higher rates make bonds more appealing to investors, drawing funds away from equities. 

Looking ahead, we expect earnings growth to have a greater influence on market performance than shifts in valuations.

The Road Forward - Expectations into 2025

Turning the page to 2025, an important question is, What now? What does this mean for you, the investor?

We believe the focus this year will remain on several key areas:

Market Breadth

Can market breadth, or broader participation in market returns, increase in 2025? We believe this will depend on whether earnings can start to expand for the average stock. 

This may prove difficult while rates are still held in restrictive territory. Although the Fed is easing, we are not yet in an environment where “everything wins.” Companies that lack pricing power or are more exposed to higher financing costs may continue to face headwinds, meaning there remains a premium on selecting higher-quality businesses.

As rates continue to come down (even if the pace is gradual), we should see a broader set of companies begin a new up-cycle in earnings. 

Current consensus forecasts predict this shift will occur at some point in 2025. Analysts anticipate that small and mid-cap companies will see faster earnings growth this year, outperforming the larger S&P 500. If realized, this trend could foster more balanced and diverse market returns.

Federal Reserve Policy

Thus far, the Fed has accomplished an impressive balancing act. Rates have been restrictive enough to bring down inflation but not too restrictive such that the economy has stopped growing. The Fed’s goal in 2025 is to continue to execute this so-called “soft landing”.

Near-term, to continue making progress on inflation, they will keep rates in restrictive territory even if it means the economy may not accelerate for a period of time. That said, they feel comfortable enough with the inflation picture to indicate they will continue to bring rates down gradually and become less restrictive as the year goes on.

The good news is that if economic data points come in weaker than expected, the Fed has plenty of room to act more swiftly and be more aggressive with regards to the pace of easing. However, it’s important to remember that monetary policy works with lead times. We don’t want to see large rate cuts from the Fed in response to meaningful economic damage that’s already been done. If they wait too long and unemployment starts picking up quickly before they step in, this could start a negative earnings cycle and lead to market stress. 

Market Positioning

While the market’s headline valuation gets a lot of media publicity, we believe investor positioning may be more important to watch near-term. 

The Bank of America Sell Side Indicator, which tracks sell side strategists’ average recommended allocation to equities in a balanced fund, reached multi-year highs in December. This has historically been a contrarian indicator.

In a similar vein, around this time last year, many analysts were forecasting an imminent recession or negative market returns. Today, however, such predictions are rare, with most experts now anticipating strong stock market performance heading into 2025.

When sentiment gets too complacent, there can be room for disappointment and short-term market volatility.

Avoiding Stagflation Risks

The greatest threat to long-term market performance, in our view, would be the emergence of sustained stagflation—a combination of persistently high or rising inflation and sluggish economic growth. In such a scenario, consumer demand would slow but the Fed would be constrained in its ability to stimulate the economy by further lowering interest rates. This would create a difficult environment for both corporate earnings and investor sentiment.

External factors could trigger stagflation, such as supply chain disruptions like those seen during the COVID-19 pandemic, or by poor, unchecked government policies. While this is not our base-case scenario, it remains a risk that warrants close attention.

Conclusion

At Range, our commitment to supporting you with data-driven insights and real-world analysis remains stronger than ever.

We’ll continue monitoring these trends and sharing updates to empower your financial strategy .If you have any questions about your portfolio or would like to discuss these topics in more detail, don't hesitate to reach out to your Range team.

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