by Chris Guinther, Senior Investment Strategist
Through 12/31/24, returns for the various indices are as follows:
2024 concluded with another strong year with an 11% earnings growth for the S&P 500 compared to the 6% earnings growth in 2023. This contributed to a return of 24% for 2023 and another 23% for 2024. Most can deduce that with the market up much more than earnings, valuations also moved a lot higher. Not too many investors saw that coming, and even fewer anticipated that yet again, just a handful of companies (the largest 7 in the country) would contribute so much to the performance of the major indices. Those 7 gigantic companies now account for over 31% of the weight of the S&P 500 index and they are really driving the boat now. We’ve seen this kind of large concentration before such as in the 1999 ‘internet bubble’. The last time this happened, the technology sector fell ~80% from peak to trough starting in March of 2000, and it took 15 years for this sector to earn back those losses. We are not saying history will repeat itself, but being students of the markets and history, we are very aware of the risks that the markets can throw at us.
Diversification is generally regarded as the cornerstone of any investment manager’s toolkit. While diversification can cause portfolios to lag in performance on the way up, it can really serve to protect portfolios from significant downside when the rain comes, and of course the rain always comes. We like to remind people of this as the market returns are high for such a small group of stocks.
While risks are always present, the good news is that the past two decades have brought more sustainable and resilient growth in the U.S. economy. The U.S. is more self-sufficient in terms of food and energy production and is lessening its reliance on trade. Our economy is less cyclical than in past decades, which supports higher valuations as more recurring revenue paves the way for more consistent earnings and cash flows. We expect these trends will continue with Trump’s promises for less regulation and lower taxes. Investors have supported the change in Washington with positive price moves. We are expecting higher returns on U.S. capital and in turn ample capital inflows alongside a strong U.S. dollar over the next 5 years. What’s not to like? Well for one, stocks and all sorts of asset valuations are historically high right now, and two, sentiment and investor bullishness are also historically very high. Stock valuations have only carried a 22x price to earnings ratio one other time, which is of concern. Investor exuberance is high enough to make a pretty good argument that too much of a good thing is already expected, so be on the lookout for disappointment. At these levels, although the economy, earnings, lower interest rates, and stability of revenues all argue for a solidly growing economy, risk managers know that the markets can turn quickly when there is a crack. For this reason, we maintain diversification using multiple asset classes, strategies, sectors, stocks, and bonds.
We continue to expect lower interest rates. This is in contrast to the move higher in the past couple of months, but the inflation indicators we monitor still appear to be trending down and with that, we expect short and long-term interest rates may approach levels seen back in the 2010’s.
We will continue to monitor and be thoughtful about building and managing client portfolios to take advantage of the positive themes while keeping an eye on protecting for the risks that present themselves in the future.
Source: All earnings/returns as reported by FactSet (1/2/25)
The information provided is for illustration purposes only. It is not, and should not be regarded as “investment advice” or as a “recommendation” regarding a course of action to be taken. These analyses have been produced using data provided by third parties and/or public sources. While the information is believed to be reliable, its accuracy cannot be guaranteed. MONTAG employees do not provide legal or tax advice. For specific legal or tax matters, you should consult with your own legal and/or tax advisors. There are risks associated with investing in securities. Investing in stocks, bonds, exchange traded funds, mutual funds, and money market funds involve risk of loss. Loss of principal is possible.
