US stocks led the charge in 2024, which they have done for many years now, with the blue-chip S&P 500 index up over 20%. The tech-dominated Nasdaq index even beat that broad-based index as the tech sector once again dominated. After a strong 2023, market outperformance in 2024 has been a major pleasant surprise. The rally has been driven by an unusual combination of rising earnings (8%) and higher valuations (22%).
The main drivers included cooling inflation and the Fed pivot. Chair Powell went ‘all-in’ on delivering a soft landing with the Fed reducing policy restrictiveness with a jumbo-sized half-point rate cut. That came in the face of a robust US economy and labour market which defied signs of a slowdown. That helped the US consumer continue to stay resilient amid persistent corporate earnings and a strong culture of promoting innovation. Optimism around AI and tech dominance barely waned and continued to underpin stock market gains.
US Dollar, Gold & Oil
The greenback has returned to its perch as the top performing major currency, with the just the pound anywhere near it on an annual basis. But we should not forget it has been a volatile year with an initial appreciation in the first few months being reversed through the summer. The last quarter has been very strong as expectations of a Trump presidency became reality. Recent two-year highs were brought about by the Republican clean sweep and the potential for dollar supportive polices. These include inflation-inducing tariffs, tax cuts and immigration plans.
Oil proved volatile but ended the year lower as the outcome of the US election was probably net bearish for prices. OPEC+ policies were critical for the market with a succession of voluntary supply cuts through the year. Demand was also seen softer, as the Chinese economy especially, disappointed. Gold enjoyed a record-breaking rally supported by the Fed’s easing cycle, central bank purchases and safe haven demand. Heightened geopolitical and economic risks also helped push prices to an all-time top at $2790 in late October.
The Economy and Fed
The Fed eventually pulled the trigger on its policy easing cycle, though markets had priced in the start on a few occasions actually before the kick off in September. That came with a surprise jumbo-sized 50bps rate cut as policymakers nailed their mast to a soft landing. Like many, we were sceptical that the FOMC could pull off such a move, but a material slowdown failed to occur.
Surprisingly robust growth, with real US GDP in 2024 of around 2.3% has seen off the doomsayers. The biggest driver of this strength has been consumer spending. According to JP Morgan, it contributed an average 78% of growth in the first three quarters, which has been dominated by high income households. Elsewhere, consumers have been more cautious but continue to spend.
2025 Outlook
In the year ahead, continued progress in real wage growth is expected to broadly support consumers. But the tailwind that we have seen since the pandemic of pent-up savings and debt may largely fade. That means consumption may contribute less to growth going forward. The hawkish re-tuning of the Fed’s communication at its final meeting in December will potentially lay the foundation for sustained dollar strengthening into the new year. The updated median dots now project only a single 25bp cut every six months for the next two and a half years, while the longer-term dot was raised by 0.1pp to 3.0%.
Undoubtedly, the major question is to what extent we see the key election promises of Donald Trump’s America First strategy. These include tax cuts for businesses and individuals, immigration controls, tariffs to incentivise re-shoring and cost-cutting efficiency savings to rein in the deficit.  These will most likely push inflation higher, leading to higher for longer interest rates and a floor under bond yields. More domestic proposals like immigration and tax cuts could come first, while the speed and scale of tariffs remains hugely open to debate. Many economists predict there will be no winners, with US consumers and exporters paying a heavy price.