Q4 2024 Review & Outlook
by Chris Broderick Research & Portfolio Strategy Director
Solid Economic Growth and Rate Cuts Fuel Further Gains in Stocks
The S&P 500 rose to an all-time high in Q4 and extended gains for 2024(1). The election results boosted expectations for tax cuts and other pro-growth policies in 2025, while the economy proved resilient with ongoing interest rate cuts by the Federal Reserve, further supporting the market.
While the fourth quarter was positive for most of the market, it didn’t start that way. Anxiety over the election and heightened attention on the fiscal state of the U.S. weighed on sentiment in October. Presidential polls narrowed significantly throughout the month and left the race too close to call, fueling political uncertainty(2). At the same time, much of the financial media focused on the potentially negative fiscal consequences of both candidates’ policies. Specifically, the Wall Street Journal highlighted the possibility of significant future increases in the deficit and national debt that could materially hinder future economic growth(3). Those fiscal concerns and stronger-than-expected economic data pushed Treasury yields higher, and the 10-year Treasury yield rose from 3.75% at the start of October to over 4.20% by Halloween. That rise in yields pressured stock, and the S&P 500 finished October with a modest decline(4).
Those headwinds proved short-lived as Donald Trump decisively won re-election while Republicans gained control of both houses of Congress, resulting in a “Red Sweep.” Much like in 2016, the Trump and Republican victories proved to be bullish catalysts as investors welcomed the prospect of future tax cuts, deregulation, and a pro-business administration(5). Shortly following the election, the president-elect nominated several unorthodox supporters for prominent cabinet positions. These surprises caused investors to contemplate policy risks to the pro-growth agenda, and stocks dipped mid-month(6). However, the withdrawal of Attorney General nominee Matt Gaetz and the nomination of Scott Bessent as Treasury Secretary helped to ease concerns about the president-elect’s cabinet, and stocks resumed their rally and closed the month near all-time highs(7).
The rally continued into December against the backdrop of resilient economic growth and a renewed focus on the potential incremental benefits of the incoming Trump administration. Yet, the rally stalled mid-month as President-elect Trump doubled down on his support for other unconventional cabinet nominations and lobbed tariff threats at significant trade partners, including Canada, Mexico, and China(8). Market volatility increased further as the Federal Reserve cut interest rates at the December meeting but also reduced the number of expected cuts in 2025 to just two (from four previously)(9). Adjusted expectations for fewer interest rate cuts led to a sharp sell-off in stocks that continued into year-end, causing the S&P 500 to finish slightly positive for the month but well off its highs(10).
2024 proved to be a very strong year for the markets. The Fed seemingly achieved a soft economic landing, while foreign and domestic political risks and drama failed to derail the rally. Thus, markets enter 2025 with high expectations, driven by optimism around Trump’s pro-growth agenda, a sustained soft landing, and continued rate cuts from the Federal Reserve.
Looking ahead, investors eagerly await the rollout of Trump’s growth-oriented policies, which include an extension of the Tax Cuts and Jobs Act and possible additional corporate and personal tax cuts alongside sweeping deregulation. If enacted, those policies should result in increased corporate earnings, individual incomes, and spending (all of which are positive for stocks).
Moreover, the Federal Reserve appears to have achieved the elusive economic soft landing, as activity is solid, unemployment is historically low, and inflation has declined substantially(11). That combination allowed the Federal Reserve to aggressively cut interest rates in 2024, and investors expect interest rate cuts to continue in 2025 and further support economic expansion.
If these economic and policy expectations are met, the markets will likely deliver another year of strong returns. However, nothing in the markets is guaranteed, and while the outlook is positive as we begin 2025, we must also acknowledge significant risks.
Geopolitical tensions remained high in 2024, but investors finished the year with hopes for progress on ceasefire agreements between Israel and its antagonists (Hamas and Hezbollah) and between Russia and Ukraine. While there is optimism for progress in resolving major global conflicts, these conflicts could escalate in 2025.
Politically, Republicans hold a slight majority in the House and Senate, and large, complicated tax-cut bills could easily be delayed (or derailed). Additionally, while investors have focused on the potential positives of pro-growth policies, increased trade tensions and possible tariffs from the Trump administration could create unanticipated market and economic headwinds.
The economy remains in a “sweet spot” with solid, but not spectacular, growth, and the Fed can claim a soft landing has been achieved. However, growth can still slow as rates remain historically high, and elevated stock valuations imply market complacency regarding the possibility of an economic slowdown.
The bottom line is that the backdrop for both the economy and markets is supportive as we start the year. While we are prepared for the positive outcome currently expected by investors, we are equally focused on managing risks to the rally and expect more elevated market volatility in 2025 should these positive expectations fail to materialize.
We thank you for your ongoing confidence and trust. Please do not hesitate to contact us with any questions or comments or to schedule a portfolio review.
1 https://paralleladvisors.box.com/v/Q12025EconIndicatorsandReturns
2 https://www.newsweek.com/donald-trump-wipes-out-kamala-harris-lead-new-national-poll-1975361; https://www.cfm.com/ polls-policies-the-us-election-and-likely-market-impact
3 https://apnews.com/article/budget-deficit-trump-harris-kamala-debt-1ee3ff65e22ccf19d19b792ee22c46da; https://www.wsj.com/politics/elections/economists-say-inflation-deficits-will-be-higher-under-trump-than-harris0365588e?msockid=39e3102d05146e2907c2047604786f6c
4 https://paralleladvisors.box.com/v/Q12025EconIndicatorsandReturns
5 https://www.reuters.com/markets/us/after-trump-win-investors-savor-red-sweep-possibilities-2024-11-08
6 https://www.barrons.com/articles/trump-stock-market-volatility-risks-2025-38750640
7 https://www.ft.com/content/012ce60b-c4da-42b3-8112-949babdfba36; https://www.newsweek.com/wall-street-sees-gains-followingtrumps-pick-bessent-treasury-1991199; https://paralleladvisors.box.com/v/Q12025EconIndicatorsandReturns
8 https://www.reuters.com/world/us/trump-promises-25-tariff-products-mexico-canada-2024-11-25
9 https://www.msn.com/en-us/money/markets/stocks-tanked-after-the-fed-signaled-fewer-rate-cuts-next-year-here-s-what-wallstreet-analysts-see-ahead/ar-AA1wai6D?ocid=BingNewsSerp
10 https://paralleladvisors.box.com/v/Q12025EconIndicatorsandReturns
11 https://paralleladvisors.box.com/v/Q12025EconIndicatorsandReturns
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