Market Review | Q4 2024

U.S. equities increased in the fourth quarter, with most of the strength coming in November following Trump’s re-election and Republicans securing a majority in both chambers of Congress. The Republican sweep suggests that Trump can and will move forward with the economic policies espoused by his campaign, including lower taxes and government deregulation, which outweighed investor concerns around potentially higher tariffs. Sell-side analysts estimate corporate tax cuts could boost earnings of companies in the S&P 500 Index by an average of 20% over the next two years. Trump’s selection of Scott Bessent for Treasury Secretary was another catalyst given Bessent’s hedge fund background, stated support for tax reform and deregulation, and expressed desire to reduce the budget deficit and increase domestic oil production. Some strategists also believe Bessent’s appointment reduces the potential for severe tariffs.

The Trump rally faded in December, as interest rates rose following more hawkish-than-expected commentary from the Federal Reserve at the committee’s December meeting despite cutting the Fed rate for the third time since the start of the year. The defensive tone was also attributed to stretched valuations, the uncertain U.S. legislative backdrop given the risk of a government shutdown in late December, and market breadth deterioration as the Magnificent Seven dominated returns late in the year. The Magnificent Seven ended up accounting for all the S&P 500’s fourth quarter gains and more than half of the Index’s overall performance in 2024, appreciating by 48.4% as a group during the year while other stocks in the Index gained 15.8%. 

Sector performance mirrored the lopsided market dynamic brought on by the Magnificent 7, as Consumer Discretionary, Communication Services, and Information Technology were among the few sectors that managed gains in the fourth quarter. Tesla, Inc., Amazon.com, Inc., Alphabet Inc., NVIDIA Corporation, and Apple Inc. led the way in these sectors. Financials was the only other standout sector, helped by double-digit gains from bank, investment banking and brokerage, and transaction & payment processing stocks spurred by the Republican sweep, which boosted expectations of reduced regulatory scrutiny and greater capital markets activity. Rate-sensitive (Real Estate and Utilities), defensive (Health Care and Consumer Staples), and commodity-oriented (Materials, Industrials, and Energy) sectors declined in the period, trailing the broader market. Small- and mid-cap stocks managed modest gains but trailed large caps by more than 200 basis points. Growth outperformed value across the board, with the differential most pronounced in the mid- and large-cap segments (where growth beat value by 900-plus basis points). Software stocks were mostly responsible for relative strength in the Russell Midcap Growth Index, while the Magnificent Seven drove outperformance in the Russell 1000 Growth Index after the group appreciated nearly 10% in the period. The Magnificent Seven’s weight in the Russell 1000 Growth was 55.7% as of 12/31/2024, up from 35.6% only two years ago. 

Information Technology

IT was one of only four sectors to manage gains in the fourth quarter, partly driven by strong performance from mega-cap Apple Inc. Broad-based strength in semiconductors, where Broadcom Inc., NVIDIA Corporation, and Taiwan Semiconductor Manufacturing Company Limited were among the standouts, also contributed to the sector’s solid performance. However, leadership wasn’t limited to mega-cap stocks, as triple-digit gains from certain mid-cap stocks in application software (AppLovin Corporation and Palantir Technologies Inc.) helped drive the sector higher in the period. 

Health Care

The sector’s run of underperformance continued in the fourth quarter driven by political headwinds, as the Republican sweep of Congress and Trump’s appointment of Robert F. Kennedy Jr. as next secretary of the Department of Health and Human Services pressured certain sub-industries. Most Health Care sub-industries were down in the period, led by double-digit declines in health care facilities, services, and supplies as well as managed health care, life sciences tools & services, and biotechnology. Health care distributors was the only group to manage gains in the period.

Real Estate

Real Estate underperformed as REITs and other rate-sensitive real estate-related categories such as homebuilders & land developers and building products/services came under pressure due to a meaningful increase in long-term interest rates. Most REIT categories sold off during the quarter, led by self-storage, industrial, triple net, and manufactured housing REITs. There were pockets of strength like data center, mall, hotel, and shopping center REITs, but outside of that, all other categories declined. 

Fintech

Fintech stocks outperformed the broader market in the fourth quarter, helped by a combination of strong earnings results and investor enthusiasm about the likelihood of reduced regulatory scrutiny and greater capital markets activity under the incoming Republican administration. Consumer finance, investment banking & brokerage, financial exchanges & data, and transaction & payment processing services stocks led the way in fintech. Financial and payment related software stocks also contributed to strength in the fintech category.

Global/International/Emerging Markets

As with the U.S. market, the principal catalyst driving global capital markets during the quarter was the U.S. election outcome. The Republican sweep has markets anticipating immigration reform, an extension of U.S. tax legislation passed in 2017 with perhaps even lower corporate tax rates, cuts/efficiencies in domestic fiscal spending, and tariffs or other protectionist trade measures that would also reduce the U.S. current account deficit. Much of this policy mix would be dollar positive in the short term, and the dollar abruptly rallied roughly 6% to a two-year high from pre-election into 2025. Equities  in developed Europe and emerging markets were broadly lower, with the MSCI ACWI ex USA and MSCI Emerging Markets Indexes down 7.6% and 8.0%, respectively, meaningfully trailing the S&P 500, which appreciated 2.4%.

Moving to fundamentals and earnings outlooks, in Europe, domestic and cross-border politics have led to currency pressure and fiscal prudence in recent quarters, although global-facing companies in this region are less exposed to these concerns. In addition, Europe’s global security and defense priorities remain center stage, and we believe spending in these areas will remain elevated. In Taiwan and Korea (and, to a lesser degree, Europe) select, strategically important companies are benefiting from the accelerating growth of AI, advanced computing, leading-edge semiconductor design/manufacturing, and data center deployment. India continues to ride a wave of productivity and secular growth, and we expect sustainable double-digit earnings gains across the economy. India continued to ride a wave of productivity and secular growth. China remains challenged by the property sector slowdown and geopolitical shifts, although the government has recently increased stimulus and support efforts, demonstrating a will and commitment to support economic growth, consumption, and financial stability. During the fourth quarter, several fresh initiatives were announced, including an RMB 10 trillion local government debt swap program, a higher fiscal deficit target for 2025, a doubling of funds for the consumer goods trade-in program, and a civil servant wage hike, alongside quite dovish language suggesting a more accommodative regulatory environment and posture towards the private sector. Korea’s broader equity market continues to be penalized for a poor corporate governance record, a good portion of which has evolved from misguided policy, including a world-leading inheritance tax that incentivizes the Chaebol-class to manipulate the value of or restructure their publicly traded holdings. Recent political events, impeachment, and likely change in leadership party may serve a potential positive catalyst, as the liberal-leaning party may actually take the harder line against Chaebol resistance to governance reform. Finally, Brazil’s currency and equity markets suffered a marked decline in the recent quarter in response to President Lula’s softening on fiscal discipline and fears that his populist tendencies will remain unrestrained in the year ahead that precedes the next presidential election.