This year has been another remarkable one for equity markets worldwide, with all the major equity markets over the intervening 25 months (China’s aside until recently) advanced sharply, led by the S&P 500 up a remarkable 68 percent. Leading the charge were North American equities, fueled by enthusiasm around artificial intelligence (AI). Investors are optimistic about AI’s potential to revolutionize productivity and economic growth. U.S. mega-cap technology stocks, known as the “Magnificent 7,” have been the primary beneficiaries of this trend, contributing approximately half of U.S. equity market returns in 2024.
The S&P 500 has seen an impressive turnaround, climbing from a low of 3,551 on October 12, 2022, to around 5,975 as of January 6th, 2025. Several factors explain this stellar performance:
• Inflation control: The Federal Reserve successfully reduced inflation from 9% in 2022 to 2.5% in the end of 2024 without triggering a recession.
• Economic growth: The U.S. economy posted robust GDP growth in both 2023 and 2024.
• Strong financial health: U.S. consumers and corporations maintained solid balance sheets.
• Economic dominance: The U.S. remains a global leader, representing 30% of the world’s GDP (a $35 trillion economy within a $105 trillion global GDP). Moreover, the U.S. stock market accounts for 70% of global market capitalization, underscoring its exceptionalism.
In Canada, the technology sector also performed well, and the gold sector shone as emerging-market central banks purchased gold to diversify their reserves, driving prices to record highs. The financial sector made the most significant contribution to Canada’s equity market gains. Despite some variability among individual banks, the sector overall showed resilience as recession fears eased and businesses and households adapted to higher interest rates.
Shifting Central Bank Policies and Broader Market Participation
2024 marked a turning point in global monetary policy, with many central banks cutting interest rates. This shift has fueled optimism for stronger economic and earnings growth in 2025. It also broadened participation in market rallies, extending gains to a wider range of stocks and sectors.
The bond market was relatively stable this year, with yields fluctuating within a narrow range. This stability, driven by growing confidence in inflation and growth outlooks, resulted in strong returns for both government and corporate bonds. In Canada, the Bank of Canada cut rates five times in response to declining inflation and a cooling economy. Similarly, the U.S. Federal Reserve recently reduced rates but remains cautious amid resilient economic data.
2025 Outlook
While we are optimistic about 2025, we recognize that U.S. equity valuations are relatively high following another year of strong performance. Healthy earnings growth and solid economic projections for 2025 and 2026 provide support for these valuations, and a more favorable policy environment could allow for further upside. In Canada, earnings growth is expected to sustain a reasonably valued stock market, although uncertainties surrounding tariffs persist.
The upcoming year will also be shaped by U.S. politics, particularly with Donald Trump’s return to the presidency. Historically, markets reacted positively to Trump’s policies of reduced regulation and lower taxes. However, potential inflationary effects of his tariff and immigration policies, and the risk of higher interest rates, could create headwinds. We believe Trump’s sensitivity to market performance will encourage a cautious approach to policy implementation.
Managing Risk in a Concentrated Market
While we are satisfied with our 2024 equity performance, we continue to prioritize diversification. The S&P 500 has become increasingly concentrated, with the top 10 stocks accounting for 30% of its market capitalization and the top 30 comprising 50%. Additionally, 45% of the index consists of technology and software firms, which we view as an over-concentration. Index fund investors should be aware of this lack of diversification. To mitigate risk, we have diversified our stock selection more extensively than the index.
Final Thoughts
As we enter 2025, we remain cautiously optimistic. While investor sentiment has turned more positive, stock prices already reflect expectations of higher growth, leaving markets vulnerable if economic or earnings developments disappoint. For this reason, we will continue to focus on large, well-capitalized companies with a consistent ability to compound capital.
We appreciate the strong contributions of both equities and bonds to our client portfolios this year and remain committed to navigating the challenges and opportunities of the year ahead.
Philippe, Alexandre & Steve