Rush Zarrabian, CFA®
Corbett Road
Managing Partner, Portfolio Manager
—
January 16, 2025

Summary

• The U.S. economy led global growth in 2024, fueled by a strong labor market, easing inflation, and resilient consumer finances. These key factors underscore continued growth and support an optimistic economic outlook for the year ahead.
• Led by the “Magnificent 7”, the S&P 500 returned 25% in 2024. For the second year in a row, U.S. large-cap stocks were the top performing asset class, significantly outperforming other asset classes. The impact of Big Tech was substantial; without these seven companies, the S&P 500’s gains would have been less than 10%, highlighting the unusually high concentration of market returns.
• While Wall Street forecasts average market returns for 2025, actual returns tend to deviate from analyst price targets, and calendar year returns are rarely in line with the long-term average. 
• Significant market declines during periods of economic expansion are rare, occurring less than 4% of the time.
• Our current microcast™ signal sits at a neutral allocation, unchanged from last month’s stance. Overall, our tactical risk models reflect a constructive outlook for equity markets.

U.S. ECONOMY SHOWED SOLID GROWTH IN 2024

The U.S. economy led the world in 2024, fueled by a robust labor market, moderating inflation, and a healthy consumer.

The U.S. labor market continued to show resilience last year. The unemployment rate remained low throughout the year, ticking down to 4.1% in December. Initial jobless claims and announced layoffs are near record lows, indicating stability in employment despite a deceleration in job growth compared to the rapid pace of 2021-2023. This suggests the labor market is transitioning from a period of rapid expansion to a more sustainable growth trajectory (chart from Yardeni):

Inflation maintained its downward trend in 2024. Despite remaining above the Fed’s target level, further progress on the inflation front allowed the Federal Reserve to confidently cut interest rates by 1% in the second half of the year (chart from MarketDesk):

Consumer balance sheets remained healthy with manageable debt levels. While there has been a slight uptick in credit card and auto delinquencies, this is rising from historically low levels and does not yet signal broad financial strain (charts from JPM):

These data points support the optimistic economic outlook we presented in our 2025 Outlook last month. Encouragingly, this trend extends beyond the U.S., with a record low number of countries projected to enter recession over the next few years (chart from Apollo):

2024 ASSET CLASS REVIEW

The following table highlights major asset class returns over the past 15 years (from Novel Investor):

Some additional insights from the above table:

1. Large-cap stocks outperformed all other asset classes, once again. The S&P 500, led by the “Magnificent 7”—Apple, Amazon, Alphabet, Meta, Microsoft, NVIDIA, and Tesla—outperformed all other major asset classes in 2024 with a 25% return, marking its second consecutive year exceeding 20% gains.
2. Cash performed well again. Cash, represented by short-term treasury bills, delivered another year of solid performance with a 5.3% return, outpacing bonds and marking the second consecutive year of 5%+ returns. However, with the Fed’s cumulative 1% rate cut since September, we anticipate lower cash returns in 2025. It should also be noted that cash is the worst performing asset class over the last 15 years.
3. Small caps rose double digits but there’s still a big gap. Smaller company stocks were the second-best performer last year, but the gap between small and large was bigger than in 2023, with large caps outperforming small caps by 14%.
4. Novel’s Asset Allocation portfolio lagged the S&P 500 by double digits. Novel Investor outlines a basic asset allocation portfolio, which they include in the above table as indicated by the gray box with the “AA” heading. This portfolio includes a mix of stocks and bonds. From 2000-2008, this portfolio consistently beat the S&P 500, but over the following 15 years, the diversified AA strategy lagged, primarily due to the rise of Big Tech stocks in the U.S. and weaker performance in emerging markets and Europe. The AA portfolio finally broke its losing streak in 2022, but that outperformance was short lived. In 2024, the AA portfolio lagged the market once again.
5. The effect of Big Tech on market performance cannot be understated. The following analysis, courtesy of DataTrek Research, illustrates the massive impact that Big Tech has had on U.S. large cap performance over the past two years:
   • Since the beginning of 2023, Big Tech has been the most important driver of annual return differentials between U.S. large caps and both domestic small caps and rest of world stock indices.
   • Without the “Magnificent 7,” the S&P 500 would have only gained 4.1 percent in 2023 and 6.3 percent in 2024 on a price return basis. The index’s actual price returns were 24.2 and 23.3 percent, respectively.
   • These “ex-Mag 7” S&P 500 returns were worse than the small cap focused Russell 2000’s gains in 2023/2024, at 15.1/10.0 percent, respectively.
   • They are also worse than MSCI All-Country ex-US returns for 2023 (+12.2 percent).

The dominance of a few Big Tech stocks within the S&P 500 is further evident in the unusually low number of individual stocks outperforming the index. Typically, about half of S&P 500 components outperform the index, but this figure has fallen below 30% in the past two years, a level not seen since the late 1990s (chart from Piper Sandler):

A HEALTHY ECONOMY TYPICALLY SUPPORTS FAVORABLE MARKET CONDITIONS

Wall Street firms are projecting an 8-10% return for the market in 2025, which closely matches its long-term average return.

The problem is that the market rarely delivers an average return in a calendar year (chart from Ryan Detrick):

This is one reason why Wall Street strategists don’t have a great track record when it comes to predicting how the market will finish in a given year (chart from Truist):

Instead of focusing solely on unreliable market predictions, a better approach is to identify the specific factors that differentiate sustained bear markets from typical volatility and corrections. This approach provides a more nuanced and insightful understanding of market dynamics.

In the last few decades, bear markets have been driven by two things: recessions and unexpected, high inflation (chart from Luke Kawa):

Further, double-digit market declines during periods of economic expansion are rare, with 2022 being the first such occurrence since 2002 (chart from Goldman Sachs):

Historically, when the economy is expanding, the market has been eight times more likely to rise by 20% than to decline by 10% or more. This pattern underscores the positive performance of U.S. equities over the past 80 years, reflecting their resilience and ability to generate strong returns during periods of economic growth.

In summary, 2024 was a strong year for the U.S. economy and markets, characterized by robust employment, declining inflation, and strong consumer balance sheets. Large-cap stocks, led by Big Tech, delivered exceptional performance, outpacing other asset classes and driving significant gains for the S&P 500. Wall Street projects average market returns in 2025, yet history shows that market performance often deviates from analyst price targets. With the economy expanding, historical trends favor continued positive equity performance.

IMPORTANT DISCLOSURES

The chart(s)/graph(s) shown is(are) for informational purposes only and should not be considered as an offer to buy, solicitation to sell, or recommendation to engage in any transaction or strategy. Past performance may not be indicative of future results. While the sources of information, including any forward-looking statements and estimates, included in this (these) chart(s)/graph(s) was deemed reliable, Corbett Road Wealth Management (CRWM), Spire Wealth Management LLC, Spire Securities LLC and its affiliates do not guarantee its accuracy.

The views and opinions expressed in this article are those of the authors as of the date of this publication, are subject to change without notice, and do not necessarily reflect the opinions of Spire Wealth Management LLC, Spire Securities LLC or its affiliates.

All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. macrocast^TM and microcast^TM are proprietary indexes used by Corbett Road Wealth Management to help assist in the investment decision-making process. Neither the information provided by macrocast^TM or microcast^TM nor any opinion expressed herein considers any investor’s individual circumstances nor should it be treated as personalized advice.  Individual investors should consult with a financial professional before engaging in any transaction or strategy. The phrase “the market” refers to the S&P 500 Total Return Index unless otherwise stated. The phrase “risk assets” refers to equities, REITs, high yield bonds, and other high volatility securities.

Use of Indicators
Corbett Road’s quantitative models utilize a variety of factors to analyze trends in economic conditions and the stock market to determine asset and sector allocations that help us gauge market movements in the short- and intermediate term. There is no guarantee that these models or any of the factors used by these models will result in favorable performance returns.

Individual stocks are shown to illustrate market trends and are not included as securities owned by CRWM. Any names held by CRWM is coincidental. To be considered for investment by CRWM, a security must pass the Firm’s fundamental review process, meet certain internal guidelines, and fit within the parameters of the Firm’s quantitative models.

Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company, Spire Securities, LLC, a Registered Broker/Dealer and member FINRA/SIPC. Registration does not imply any level of skill or training.