2024 turned out to be another banner year for U.S. stocks. The S&P 500 led the overall market gaining 23% in 2024. This follows a 24% gain in 2023 and marks the first time since the late 1990’s that the index has had back-to-back gains of more than 20%. In both 2023 and 2024, the index’s performance had been dominated by a handful of big tech names which now comprise most of its value.
If you were to measure the S&P 500 on an equal-weighted basis (meaning every stock contributed the same), the return would have been roughly 18% in 2024. This is still an impressive number, but almost a quarter less than the cap-weighted version and shows just how meaningful the tech sector of the market has become. Here are a few of the numbers to make that point:
| 2024 Gain | % of S&P 500 | |
| Apple | 30% | 7.41 |
| Nvidia | 171% | 6.30 |
| Amazon | 46% | 4.22 |
| Meta | 65% | 2.65 |
| Broadcom | 107% | 2.26 |
These 5 companies represent approximately 23% of the entire index’s value while the tech sector comprises 33% of the index. 2023 pretty much told the same story. Large cap technology stocks dominate the market now.
The enthusiasm for these stocks isn’t misplaced in our opinion. Artificial Intelligence and the hardware that supports it looks to be the next transformative revolution. It wasn’t that long ago that it was considered an accomplishment for a self-driving car to navigate orange cones in an empty parking lot. Now they’re roaming the streets of San Francisco. The world was introduced to the wonders of Chat GPT just a couple of years ago and now all your search results come from it or something like it. It takes an incredible amount of energy and computing power to run these systems and the capital being poured into the hardware is enormous. So, the companies that are developing the software and the ones building the hardware are both experiencing massive growth.
The economic backdrop to the market continues to be focused on interest rates and the Federal Reserve. The stock market has been able to absorb a huge runup in rates over the last couple of years driven by earnings growth, but that trend seems to be running out of steam. Stock’s performance over the last quarter of 2024 seems to have been more tied to the Fed rate cuts than anything else. After months of anticipation, the Fed finally started to lower rates with 3 cuts late in the year. This and the election results (generally viewed as positive for business) fueled the 4.5% fourth quarter rally. Since then, strong economic data has put 2025 rate cuts in doubt leading to a pullback in stocks.
We expect this year to look much like this past quarter. Stocks are going to swing in the direction of any rate cut expectations. Look for CPI, wages and employment growth to be the key indicators driving Fed policy this year. While officially independent, the Fed governors are still subjected to political pressures. Higher rates have tripled the government’s cost of borrowing and made big ticket items more expensive. They’re between a rock and a hard place when it comes to fighting inflation and higher borrowing costs. The stock market is keenly aware of this and will be trying to tease out the Fed’s read on every data point as it’s released.
More recently, long-dated treasuries have sharply sold off driving long bond yields significantly higher. The yield on the 10-year treasury has moved up roughly a full percentage point since the beginning of December. As of this writing, the 10-year note is yielding 4.8%, a level not seen since October of 2023. While this has been a drag on stock prices, the good news is it has provided us more opportunities to lock in excellent long-term cash flows for our income-oriented clients. This is especially helpful since the bonds coming due this year have higher coupons than the ones that have paid off in recent years.
Although the returns will likely be more modest, we think this year will be much like last year. The Fed will be the main focus of the stock market and longer dated rates will remain higher. It’ll be a data driven market as the Fed plots its policy course.
