Q4 2024 Market Review & Outlook

By Andrew Comstock, CFA

The final quarter of 2024 closed on an upbeat note, with stocks finishing the year on solid footing. The S&P 500 posted an impressive 25% gain for the year, marking its second consecutive year of 20%-plus returns. Notably, this represents the fourth time in six years that the index has delivered returns of 20% or better. This year's rally was largely fueled by technology and AI stocks with the NASDAQ up 29.6%.

The market gained strength thanks to data showing that the economy is steadily moving toward a soft landing. Additionally, post-election optimism contributed to gains, with markets responding favorably to expectations of tax cuts and regulatory easing anticipated during President Trump’s second term.

Despite the stellar annual performance and strong start to the quarter, the year's finish was more subdued. The Federal Reserve (Fed) threw some cold water on markets at their December meeting. The Fed signaled plans to reduce rates only twice in 2025, a more conservative approach than the four rate cuts anticipated earlier. This shift in monetary policy expectations of keeping rates higher caused some market participants to take profits after a strong year for stocks.

Investment Strategy

This quarter, we added the Avantis Small-Cap ETF to your portfolio to diversify and enhance your US small-cap exposure. The US small-cap market is extensive, comprising of roughly 2,000 companies, though a notable portion—40% to 45%— do not earn a profit. This ETF takes a thoughtful approach by investing in companies with a track record of consistent profitability and strategically overweighting those with strong earnings and attractive valuations. We believe this disciplined focus positions your portfolio to achieve stronger performance over the long term.

To incorporate this new holding, we reduced your position in the Schwab Small-Cap ETF. The combination of these two funds strengthens your portfolio’s risk-return profile while maintaining your overall small-cap weighting.

No other changes were made to your investment strategy this quarter. Your portfolio remains fully invested and aligned with your strategic targets to stocks, bonds, and cash.

Outlook

As we move into 2025, we are encouraged by opportunities in both the stock and bond markets but caution that this is not a time to get greedy, particularly when it comes to stocks. The past two years have been exceptional for stock performance, but history reminds us of the importance of setting realistic expectations.

Large-cap stocks (S&P 500) are trading around 22x forward earnings, a valuation well above historical averages. These valuations are supported by near-record profit margins and 2025 earnings growth projections of 12% to 15%, but there is little margin for error. If expectations are met, returns should continue to be strong. If earnings or profit margins fall short of expectations, equity markets could experience notable weakness.

As we reflect on the past two years of exceptional market performance, it’s important to temper expectations for a third consecutive year of well above average returns. Stocks have achieved consecutive gains of over 20%, a rare occurrence that has happened only 10 times since 1871. Following such periods, market returns have averaged around 4% in the subsequent year. While prior instances have shown positive outcomes in five out of nine cases, with an average return of 15.6% in those years, continued 20%+ gains have been largely confined to extraordinary periods like the late 1990s or the Roaring 1920s. These historical trends remind us that while past performance sets a high bar, it doesn’t guarantee continued strength.

Turning to the political landscape, the incoming Trump administration presents a mix of market-friendly initiatives and potential risks. Policies such as extending current tax laws, slated to expire at the end of 2025, and reducing regulatory burdens are widely viewed as supportive of economic growth. However, the introduction of tariffs or other inflationary policies could introduce headwinds. This is one of the biggest wildcards heading into 2025 because tariffs can spark inflation and decrease growth. Additionally, the Republicans' narrow Congressional majority may add political uncertainty, contributing to market volatility as investors adapt to a shifting policy environment.

Last but not least, let’s discuss the bond market. The Federal Reserve has signaled a cautious approach for 2025, with expectations of only two interest rate cuts. This could keep short-term rates higher than initially anticipated, benefiting savers but potentially limiting economic momentum. Meanwhile, inflation concerns have nudged intermediate (5 to 10-year) yields upward as investors demand higher compensation for perceived risks around inflation and government deficits. With rates likely to remain within a narrow range of ±0.5% from current levels, the expected returns for bonds are attractive. Current yields are close to their highest levels in a decade and downside risks are limited in this environment.

Looking ahead to 2025, a thoughtful balance between optimism and rationality will be key. We will continue to manage a diversified portfolio that aligns with your long-term goals.

 About Andrew

Andrew Comstock, CFA® is Principal & Wealth Advisor at Beyond Wealth, a fiduciary financial advisory firm in Overland Park, Kansas, dedicated to empowering clients to make meaningful financial decisions. Serving the Kansas City metro area, Beyond Wealth specializes in helping mid-career professionals, business owners, and individuals navigating life transitions. With a mission to help clients realize meaningful financial goals, Andrew’s proficiency lies in leveraging his background in institutional investment management to create tailored investment strategies. He provides research-driven portfolio management, focusing on helping clients build wealth for key milestones, whether it’s buying a home or funding their children’s education. Alongside Brandy, Andrew combines comprehensive planning with a long-term investment approach, helping clients grow their wealth while enjoying life.

Andrew began his career in institutional investment management, managing portfolios for insurance companies, pension funds, and mutual funds. Inspired by a desire to make a more personal impact, he transitioned to advising individuals directly, bringing his passion for financial empowerment to Beyond Wealth. Known for his commitment to high standards and continuous improvement, Andrew is dedicated to delivering thoughtful, tailored strategies for his clients’ unique financial needs.

 Andrew graduated from the University of Tulsa with a BSBA in Finance and obtained the Chartered Financial Analyst® designation. Active within his professional community, he’s a member of the CFA Institute, Kansas City CFA Society, and serves on the University of Tulsa’s Board of Trustees as National Board President of the Alumni Association; Andrew is also involved locally as a member of the Overland Park South Rotary. Outside of work, Andrew is a devoted Kansas City sports fan who loves exploring the city’s vibrant restaurant scene, especially the BBQ hotspots. With dual citizenship in the U.S. and Ireland and experience living in Switzerland, he’s an avid traveler who’s visited 37 countries and counting. Andrew is also a proud cancer survivor, a perspective that reinforces his commitment to helping families feel confident about their financial futures while embracing the present. To learn more about Andrew, connect with him on LinkedIn.