Key takeaways
For the second year in a row, the stock market is on track to post annual gains of more than 20%.
Market leadership recently broadened out to include small-cap stocks and sectors beyond technology stocks.
With the election over, investors are waiting to see how the new administration’s policies could impact capital markets in 2025.
Markets reacted positively to the outcome of the 2024 election. “The market adjusted its pricing once the uncertainty of the election outcome was removed as an issue,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. From November 6 to month’s end, the S&P 500 index gained more than 4%. However, other factors contributed to November’s strong performance. “We continue to see economic growth, inflation and Federal Reserve (Fed) interest rate policy as the primary capital market drivers. There is potential for government policy to become more prevalent in investors’ minds as the new administration’s priorities develop.”
“It appears even though stocks have risen significantly for two years in a row, more upside potential remains.” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management.
The U.S. economy’s strength stands out in world markets. In the third quarter, the U.S. economy grew at an annualized rate of 2.8%, consistent with the second quarter’s growth rate of around 3%.3 Solid economic expansion continues to propel corporate earnings growth as well.
As 2024 has unfolded, equity markets “spread the wealth.” Unlike trends throughout 2023 and early 2024, when technology-oriented stocks (communication services and information technology) dominated market performance, other market sectors rose to join them at the top. Year-to-date through November, financial stocks represent the top-performing sector with communication services, information technology and utilities following close behind. Year-to-date, only those four sectors outpaced the broader S&P 500 index. For the year, however, all sectors are in positive territory.1
With the election over, investors are increasingly focused on what’s to come from the second Trump administration’s policies and its potential market impact. During the campaign, Trump promoted several key initiatives, including extending tax cuts that were part of 2017’s Tax Cut and Jobs Act (those cuts are set to expire at the end of 2025), stricter immigration policies and potential new tariffs on imported goods. Markets will closely monitor the subsequent impact on economic growth and inflation. “We are still waiting for clarity on whether the new administration’s and Congress’ policies prove to be inflationary,” says Eric Freedman, chief investment officer with U.S. Bank Asset Management. “Because we don’t yet have full details, our preference is to be mindful of short-term opportunities provided by market dislocations, but we don’t want to draw conclusions without sufficient evidence.”
Dating back to 2023, a key trend was investors’ preference for large-cap stocks. In late 2024, small- and mid-cap stocks narrowed the performance gap. For the year, large-cap stocks still generated the highest returns, yet over the three months ending in November, small- and mid-cap stocks outpaced large-cap stocks.4
At its meetings in September and November, the Fed implemented federal funds target interest rate cuts totaling 0.75%, with the possibility of another 0.25% rate cut in December. Despite the Fed’s actions, from mid-September to mid-November, the yield on the 10-year Treasury bond rose more than 0.80%, though in late November and early December, yields retreated.5
Will Trump administration initiatives alter Fed monetary policy moving forward? “Fed Chair Jerome Powell has made clear that Fed policymakers will wait for data and not engage in conjecture as they determine interest rate decisions,” says Haworth. “The market is beginning to assume that if the economy gets a boost from tax cuts, the Fed may scale back 2025 rate cuts.”
Anticipating continued solid economic growth, investors may wish to consider an equity overweight allocation, trimming fixed income positions within a diversified portfolio. “Our position is to own a globally diversified equity portfolio, not specifically focusing on U.S. stocks or particular sectors,” says Haworth. He believes that as 2024 ends, equity markets are well positioned. “It appears even though stocks have risen significantly for two years in a row, more upside potential remains.”
“We still think it’s a great time to be invested and for those with money in cash, it represents an opportunity to put capital to work in longer-term assets,” says Freedman. He encourages investors to view markets with a long-term lens. “Timing the markets and trying to be precise on when to be in and when to be out is challenging,” says Freedman. “Investors should be aware there’s a lot of noise. We urge clients to take a deep breath, go back to your plan. That will increase your odds of success.”
This is an important time to check in with a wealth planning professional to make sure you’re comfortable with your current investments and that your portfolio is structured in a manner consistent with your time horizon, risk appetite and long-term financial goals.
The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. Diversification and asset allocation do not guarantee returns or protect against losses. The Russell MidCap Index provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment. The Russell 2000 Index refers to a stock market index that measures the performance of the 2,000 smaller companies included in the Russell 3000 Index.
Stocks are shares of publicly traded companies can be bought and sold. These transactions occur on exchanges and over-the-counter (OTC) marketplaces. The activity of pricing, buying and selling stocks is all activity that occurs in what is generally called “the stock market.”
Stocks frequently move up and down. Between November 2023 and November 2024, the stock market trended higher (following a generally downward trend between August and October 2023), except for modest setbacks in April and October 2024.1 Solid U.S. economic growth, which helped boost corporate earnings, appears to be fueling today’s stock market rally. In addition, the Federal Reserve (Fed) reversed its longstanding interest rate policy that, for more than a year, held the target federal funds rate at a top level of 5.50%. In September and again in November 2024, the Fed cut interest rates for the first time in more than four years, with more cuts expected in the year ahead. “The Fed’s interest rate stance is a prime consideration for equity investors in today’s market,” says Haworth.
These three indices are frequently quoted on daily news reports reflecting daily performance of the stock market. The Dow Jones Industrial Average, perhaps the most quoted index, reflects the performance of 30 prominent stocks listed on U.S. exchanges. The Standard & Poor’s 500 tracks a broader universe of 500 large U.S. stocks. The NASDAQ Composite Index provides a measure of performance of 2,500 stocks listed on the National Association of Securities Dealers (NASD) Automated Quotations exchange. These represent small-, mid- and large-cap stocks. Investors often track these indices, particularly over time, to measure broader stock market performance.
With inflation retreating and more interest rate cuts likely, how should investors position their portfolios to capitalize on potential opportunities, while guarding against risks?
A fresh look at managing your cash and investments in today’s changing interest rate environment can help support your pursuit of the goals that matter most to you.
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