With wars raging in Ukraine and the Middle East, as well as elections in countries homing around four billion people, 2024 was always expected to be turbulent. With this in mind and following a 26% recovery for the S&P 500 in 2023, we, and most economists, started the year with relatively modest expectations in terms of growth.
As it turned out, the S&P 500 exceeded forecasts for the calendar year 2024, gaining 23% and having closed at record highs on more than 50 days. For the fourth quarter, the S&P 500 was up around 2.4%, despite ending the month of December down by a similar percentage. Moreover, the two year performance number marks the first time since 1954/5 that the S&P 500 has produced this level of returns in back-to-back years.
However, like in 2023, the S&P’s performance in 2024 was misleading, with one stock (Nvidia) accounting for 20% gain of the 500 stocks, and five stocks (Nvidia, Apple, Meta, Microsoft, and Amazon) accounting for 45% of the total return. The equally weighted version of the same 500 companies only gained 10.90% for the year. While our preferred global funds delivered pleasing returns for the year, they significantly lagged the S&P 500 and MSCI World indices because of their deliberately underweight exposure to the above five stocks. While the various funds do have differing levels of exposure to Apple, Meta, Microsoft, and Amazon, they are generally absent from Nvidia, and their cumulative weighting to their preferred four is well below that of the indices, as active managers, in general, seek to avoid concentrating too much risk on any particular sector or stock.
The wild Trump card
Now, as we enter 2025, we expect two major factors to dominate performance: The impact of Trump’s return to the White House and how the Fed’s rate-cutting cycle plays out. We do not dwell too much on Trump in this particular piece, since we have covered the topic in greater detail in a separate article.
It is however worth stating that Trump’s pro-growth policies and preference for deregulation could be positive for markets. His determination to ensure American leadership in cryptocurrencies and AI may give the Big-Tech sector a second leg up, with Tesla already seeming to benefit from CEO Elon Musk’s proximity to the president-elect.
On the flipside, some Trumpian policies such as a clampdown on migrants and a focus on tariffs could fuel inflation. Trump’s deeds and actions notwithstanding, how the Fed responds to inflation data and US economic performance will, as always, have a massive bearing on market performance.
Although the first US inflation numbers released in 2025 are encouraging, the US economy is still running hot, and most economists expect the Fed to cut interest rates only two more times this year. Along with the record returns of 2023 and 2024, this might constrain returns for 2025. The upside though is the fact that the other 495 stocks in the S&P (and indeed the bulk of the MSCI World Index), are not priced at high valuations and should thus not be as susceptible to the potential Trump or Fed-induced headwinds.
The Fed paradox
Paradoxically, one scenario where stocks might benefit is if the US economy stutters. Should the US economy falter and the Fed cuts rates more aggressively, this will improve equity valuations and may encourage investors to exit cash, thus driving better stock market returns. This is especially the case in an environment where economists and investors have priced in modest interest rate cuts.
Conversely, if the economy continues to run hot, the Fed may be more conservative in cutting interest rates and investors will find yields on Treasuries and cash to be attractive – limiting the scope for stock market gains. In either case, following the exceptional performances of 2023 and 2024, it will be challenging for the S&P 500 to deliver double-digit returns in 2025.
Stock markets outside the US have not performed as spectacularly as the S&P 500 and Nasdaq indices over the past two years. There might be some scope for some of these indices to catch up – although most countries are simply not producing the economic performance that has bolstered US earnings.
The geopolitical uncertainty that shaped 2023 and 2024 persists. While a ceasefire agreement between Israel and Hamas could be approved by the Israeli cabinet as soon as today, it remains to be seen if there is a path to long-lasting peace. The conflict between Russia and Ukraine, however, continues to rage. Positive resolutions to these conflicts could provide some upside to financial markets.
South Africa
When it comes to South Africa, the JSE All-Share Index delivered a total return of 13.44% in rand and a more modest 9.9% as measured in US dollars for the calendar year, having lagged global indices and validating our conviction that offshore markets offer better growth opportunities at lower risk. South African risks and the outlook for the rand in 2025 are explored in a separate article in this publication.