AAF Wealth Management Q4 2024 Market Insights

In an ongoing commitment to keep you abreast on a range of issues that might affect your business and personal financial health, AAFCPAs is pleased to share Q4 2024 Market Insights published by AAF Wealth Management, a wholly owned subsidiary of AAFCPAs. This provides investors with an understanding of what’s driven performance of late.

Overall, 2024 was a strong year for investors, with the S&P 500 enjoying its second consecutive year of 20+ percent returns despite considerable volatility particularly in the fourth quarter. The year’s rally that initially focused on a narrow group of stocks expanded last summer but ended 2024 much as it began, with a handful of stocks and sectors driving performance. Today, we hope to provide you with a clear understanding of the current market landscape along with insights into what you might expect in 2025.

Q4 2024 Recap: A Return of Volatility

While the first nine months of 2024 saw 10 of 11 S&P sectors posting double digit gains, the last three months told a different story entirely. Market volatility increased as the prospect of a Trump victory grew more likely, and investors adjusted strategies to position themselves in sectors that might benefit under a second Trump term. As a result, cryptocurrencies, financial companies, energy, utilities, and industrial stocks all posted outsized returns in the two weeks following the election.

Driving those returns was the notion that those sectors would benefit from deregulation, lower interest rates, and the promise of a new special strategic reserve denominated in Bitcoin to the delight of crypto fans. By contrast, health care and materials suffered the largest declines as the market anticipated sweeping changes to the pharmaceutical industry and as the specter of tariffs raising raw material and commodity prices grew more likely.

Nevertheless, by December the market refocused its attention on the Federal Reserve and what Jerome Powell might have in store for the direction of interest rates in 2025. Having kicked off the current rate cut cycle in September with a 50 basis points (0.50 percent) decrease, and subsequent 25 bps cut in November, investors had high hopes for another full 200 bps of cuts in the Federal Funds Rate (FFR) by the end of 2025. In total, the market anticipated the Fed would reach its desired level of 3.5 percent on the FFR by the time the dust settled this year.

Yet at the December Federal Open Market Committee (FOMC) meeting, it became clear that Chairman Powell’s overly cautious tone toward inflation meant the Fed likely moved too quickly with their prior two rate cuts, thereby signaling a change or slowdown in both the amount and/or timing of future cuts. Once seen as a done deal, inflation was back on the radar, forcing Powell to state that the Fed would be more deliberate in any possible interest rate cuts in the New Year.

Since inflation is a primary concern, this renewed focus on preventing a surge will likely extend the current rate-cutting cycle well into 2026. Before FOMC’s December decision, stock and bond investors sold positions, culminating in a five-day losing streak for U.S. markets. Driving this response by investors was a desire to reposition portfolios in advance of a tougher inflation backdrop in the new year to come, as well as the uncertainty that comes with a new presidential administration.

The Impact of The New Administration

President-elect Trump has historically been more than willing to share his thoughts on topics that will shape markets. More than any other variable at play, his promise to institute blanket tariffs on trade partners will likely have the furthest-reaching effects on U.S. economic growth.

While Trump’s use of tariffs is not a novel approach to influencing economic concessions from trading partners, the magnitude of potential tariffs called for since his reelection in November is. Calls for a minimum 20 percent blanket tariff across the board on all imports and 60 percent tariffs on Chinese goods far exceed those instituted in his first term.

For investors, future successes will depend on the ability to gauge what impact tariffs may have on the balance sheets of companies in which they invest. While impossible to guess to what extent tariffs will be used, it is improbable to suggest they will not factor largely into the next administration’s toolbox. As the leading index for most investors worldwide, the S&P 500’s profitability is heavily tied to the international sale of products and services as nearly 30 percent of the index’s revenue is derived from overseas sales.

Estimates of the impact on blanket tariffs for imports, and subsequent retribution tariffs by trading partners, could reduce S&P 500 earnings by nearly five percent if fully enacted. Specifically, technology, materials, health care, industrials, and consumer discretionary names would be most affected from an earnings perspective. Conversely, many of the threats communicated may wind up as bargaining tools to open negotiations with trading partners.

The importance of international revenue to many U.S. companies with overseas operations is clear and cannot be ignored. As such, we could see Howard Lutnick and Scott Bessent, who have been nominated to serve as Secretaries of Commerce and Treasury respectively, taking strides to center tariff policies on their benefits to the U.S. economy and concentrate efforts on products that will provide the most benefit to U.S. consumers and organizations alike.

Deregulation and The Push for Lower Interest Rates

In contrast to simply viewing the impact on earnings, certain sectors may benefit from tailwinds Trump promotes. Meanwhile Trump’s pro-energy stance will likely focus on further oil exploration and drilling, possibly benefiting a range of energy names. As it pertains to the cost of capital, Trump would like to see interest rates lower than where they are today. A lower-rate environment would help both the real estate sector at large and utilities stocks, which investors are drawn to for their higher yields.

Deregulation may also be viewed as a positive for financial companies, as they can help to cut costs and open more lines of business. While not considered traditional finance, cryptocurrency enthusiasts may see significant opportunity, as well, as a change in leadership at the SEC would be viewed as welcome relief to the current commissions’ hardline stance toward digital currencies over the past four years.

As we look ahead, we are confident in the opportunities on the horizon and are focused on ensuring client portfolios are positioned for long-term growth. We aim to keep AAFCPAs’ clients and curious subscribers informed about our outlook and how it may influence your returns in the future. In addition, we will continue to identify key trends and provide clear, well-informed guidance to help you navigate market changes.

If you have questions, please contact Kevin P. Hodson, CMT, CAIA, AIF® at 774.512.4173 or khodson@nullaafwealth.com—or your AAFCPAs Partner.

AAF Wealth Management is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where AAF Wealth Management and its representatives are properly licensed or exempt from licensure. This blog is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by AAF Wealth Management unless a client service agreement is in place.