Again, we challenged ourselves to determine what could be the single-most important catalyst to drive markets higher in the new year and put it atop our wish list for Santa Claus.
At the top of our Christmas wish list last year was the hope for a broad corporate earnings growth reacceleration beyond the market-leading, mega-cap tech companies known as the Magnificent 7: Apple Inc.; Microsoft Corp.; Amazon.com, Inc.; Alphabet Inc.; Nvidia Corp.; Tesla Inc. and Meta Platforms, Inc. A broader earnings reacceleration could have led to greater market breadth, yet market participation failed to return to the highs of the cycle in 2021 despite strong performance. We must have been on Santa’s naughty list again this year, because while consensus expects S&P 500® earnings to grow 9.5% in 2024, more than half is expected to come from just the Magnificent 7.
Although 2024 kicked off with a consensus view full of optimism that the Federal Reserve (Fed) would soon begin aggressively cutting rates — by approximately 150-175 basis points (bps) in 2024 — dreams were dashed when inflation proved harder to beat than most expected. Instead, the Fed held off on rate cuts until September and made only 75 bps of cumulative cuts through November 30.
Additionally, manufacturing activity in the U.S. was sluggish throughout the year, and global economic growth, especially in China and the Euro Area, remained modest. This slow-growth environment presented a challenging backdrop for smaller, more cyclical or more value-oriented companies to thrive. Thus, a broad acceleration in earnings growth was unable to take flight.
While we hope last year’s gift is merely lost in transit and arrives sometime next year, in the meantime, we have a new wish for Santa. With rate cuts finally underway, we’re looking forward to seeing this monetary policy “recalibration” work its way through financial markets, and ultimately, into the U.S. economy. Accordingly, we have an ask for Santa that could serve as a broad market catalyst in 2025.
Topping our Christmas wish list this year is… a mid-cycle reacceleration! If we get our wish, monetary policy should play a smaller role for markets in 2025, allowing fundamentals such as earnings and valuations to come into focus, which would be a welcome change for investors.
