2024 turned out to be a great year for investors, despite an underwhelming end. The S&P 500 set record highs 57 times in 2024. Despite economic uncertainty around a hotly contested presidential election, elevated interest rates and a slowly cooling labor market, economic growth remained steady this year, with many positive signs for continued growth in 2025.
Even so, the economy proved to be far from perfect. Inflation was stubbornly slow to recede, leading the Federal Reserve to adopt a higher-for-longer approach to interest rates. The housing and manufacturing sectors saw continued struggles under the weight of higher borrowing costs, and consumers with higher levels of debt led to rising delinquency rates.
On December 18th, the Federal Reserve reduced the federal funds target rate again by 0.25% to a range of 4.25%–4.50%, which was the third rate cut of 2024. The Fed has now lowered rates by a total of 100 basis points this year as it attempts to balance economic growth with inflation control. Projections suggest a more gradual approach to rate adjustments in 2025, with expectations of two additional rate cuts, a departure from the four initially anticipated—reflecting ongoing concerns about persistent inflation. Core inflation remained at 3.3% across all three reports between September and November, still hovering above the Fed’s intended target of 2%, but substantially lower than highs seen in recent years.
Buoyed by a boom in generative AI and 5G infrastructure in 2024, the information technology sector rose 35.7% and telecommunications grew by 38.9% year-to-date. Semiconductor producer Nvidia was one of the index’s largest gainers, gaining over 170% in 2024 alone. On the other side of returns, real estate and healthcare—two of the more defensive sectors historically—achieved only 1.3 % and 0.9% of growth, respectively, while the materials sector fell by 1.8% on the year.
Overall, 2024 was a rewarding year for diversified investors with major equity and fixed income asset classes delivering positive returns. US equities dominated, but fixed income gains were modest , especially being negatively impacted in the fourth quarter. In Q4, the resilience of the US economy was positive for US equities, but also pushed bond yields significantly higher, resulting in a decline across most fixed income categories. International equity markets reversed much of their gains in Q4 but still delivered solid returns for the year.
US Equities
U.S. indices had an impressive 2024, once again led by large-cap stocks. The Dow advanced 12.9%, the S&P 500 rose 25%, and the Nasdaq surged 29.6%.
Large cap stocks substantially outperformed small caps over the year, reflecting their superior earnings power, strong balance sheets, and stability. This trend highlights the importance of company size and market position in driving performance, particularly in uncertain economic environments.
In the fourth quarter of 2024, small-cap stocks delivered mixed results, reflecting a challenging economic and market environment. The Russell 2000 Index, a key benchmark for small-cap stocks, posted a modest gain of 0.3% for the quarter, underperforming its large-cap counterpart, the Russell 1000 Index, which rose by 2.8%.
This underperformance in small and mid-cap stocks was consistent with broader trends observed throughout the year, as investors gravitated toward larger, more established companies during periods of economic uncertainty. Sectors within the small-cap space showed varied performance, with growth-oriented stocks slightly outperforming value-oriented ones, driven by strength in technology and consumer discretionary sectors.
International Equities
Continued US strength was also seen abroad, as it helped to spur developed market equities deliver total returns of 19.2%, and a late rally in Chinese equities paired with strong results out of India and Taiwan helped emerging market equities deliver 8.1% for the year.
However, both developed and emerging markets equities struggled in Q4, with the MSCI EAFE Index dropping 8.1% and the MSCI Emerging Markets Index falling by 7.8%. Broadly, European and Pacific equities both struggled in the fourth quarter, falling under pressure from tariff concerns and political turmoil across both regions. In Europe, France faced a toppling government and a new prime minister after a vote of no confidence for the incumbent; while in Asia, South Korean President Yoon was impeached after briefly declaring martial law. The struggling Chinese economy also remained in play, as underwhelming economic data offset economic stimulus enthusiasm.
UK equities marginally outperformed their continental counterparts with returns of 9.5% as the economy recovered from the 2023 lows. This cyclical rebound was boosted by initial optimism following the election, however the autumn budget, which delivered larger tax increases than anticipated, dampened some of the positivity.
In Asia, Chinese activity remained weak as the country grappled with falling property prices and weak consumer confidence. Investors were initially unimpressed with the policy response. However, September’s more cohesive policy announcements appeared to convince markets that 2025 would finally see the significant stimulus required to restart the economy and Chinese equities rallied in the second half of the year to deliver 19.8% over 2024. Continued optimism about the end of deflation, coupled with a weak yen and ongoing corporate reforms, helped Japanese equities deliver returns of 20.5% to end 2024 as the second best performing major equity market.
International stocks continue to be priced well below their US counterparts as a multiple of earnings, and it will be interesting to see how this plays out over the next several years.
Fixed Income
Gains in U.S. fixed income markets were notably more subdued than equity returns. This was largely because Treasury yields ticked up as the Fed successfully navigated towards a ‘soft landing.’
High yield bonds were the best performing sector for the fourth year in the row as a combination of high yields and tightening credit spreads boosted returns to over 8% in that category. Conversely, fixed income with longer duration and higher credit rating underperformed against a backdrop of rising government bond yields. European government bonds outperformed US Treasuries as the weaker economic outlook translated into greater confidence in the downward direction for interest rates.
Short-term treasury yields fell following the Fed’s December 18th rate cut, while longer-term yields climbed higher. The 1-month fell by 36 basis points while the 30-year rose by 42 basis points at the opposite end of the curve.
Recent changes in both the short and long ends of the curve are notable. The short end reflected the Federal Reserve’s widely anticipated interest-rate cuts, which amounted to another 0.5% in Q4 and 1.0% in total since September. On the opposite side, the long end of the curve has steepened, with the 10-year Treasury yield rising 95 basis points since the Fed’s rate cuts began. This increase in longer-term yields is unusual in a rate-cutting cycle and reflects investors’ new outlooks for more growth, more inflation, and fewer interest-rate cuts.