By Jane Swan, CFA and Roraj Pradhananga, CIMA & CPA

As we seek to update you on the state and the economy, we recognize that many of our clients and colleagues have limited their news consumption since the election. We are an engaged community, many of us on edge over the chaos and potential harm we may experience over the next four years. We pledge to continue keeping you updated on our fact-based interpretations of the economy and markets. We will continue to add our analysis about how the facts impact our themes of climate solutions and the environment, racial and gender equity, sustainable and regenerative agriculture, and community wealth building.

US Economic Growth

The US economy remained strong in 2024. The economy grew at a steady pace in 2024, growing at a year-over-year rate of 2.7% in the third quarter. Consumer spending, bolstered by a resilient labor market, continues to be a key driver of economic growth. The unemployment rate fell in December to 4.1% from 4.2% the prior month. The fourth quarter GDP growth is also expected to remain strong based on the latest forecast.¹

US GDP trends q1 2020 through q4 2024

RS and LS refer to the right and left series in the chart. Sources: U.S. Bureau of Economic Analysis, FRED, and U.S. Bureau of Labor Statistics²

Inflation and Consumer Price Index (CPI) Trends

Inflation continued to slow in 2024. The annual headline inflation rate in the US rose for a 3rd consecutive month to 2.9% in December 2024 from 2.7% in November. 

Chart: Fed funds rate, Inflation, and Consumer Price Index data q1 2020 - end of q4 2024

Core CPI, which excludes volatile food and energy prices, unexpectedly declined slightly from 3.3% to 3.2%. December Producer Price Index (PPI), which foreshadows CPI, came in cooler than expected at 0.2% month-over-month, decelerating from 0.4% in November and core PPI was flat at 0.2%. While core inflation continues to ease, it remains above the Federal Reserve’s 2% target. The advance in the CPI was led by food prices, airfares, new and used cars, auto insurance and medical care. Shelter prices, the largest category, climbed 0.3% in December, weaker than most months since inflation soared in the spring of 2021. 

Source: Bureau of Labor Statistics³

Possible policy changes around tariffs, taxes, and immigration could be inflationary. Inflation expectations for 2025 remain above the 2% target. Investors continue to be concerned about sticky inflation and the Fed’s path to contain it. Since September, the Fed has lowered interest rates by 100 bps, a significant shift in monetary policy. Three consecutive rate cuts have brought the Federal Funds rate, the interest rate banks charge each other for short-term loans, down to 4.3%.

The US Labor Market and Unemployment Rates

Unemployment remains very low. The unemployment rate ticked down to 4.1% in December from 4.2% in the prior month. The US labor market demonstrated robust performance in December 2024, with job growth surpassing expectations. Non-farm payrolls increased by 256,000, the strongest gain since March, exceeding economists’ forecasts of around 160,000 new jobs The three-month average held steady at 170,000 for the second-straight month, the highest since May. For the year, employers added 2.2 million workers.

US jobs and unemployment data 2005 - 2024. Sources: U.S. Bureau of Economic Analysis, FRED, and U.S. Bureau of Labor Statistics

Sources: U.S. Bureau of Economic Analysis, FRED, and U.S. Bureau of Labor Statistics⁴

The average hourly earnings increased 0.3% for the month for a 12-month gain of 3.9%. Job openings also increased in November, but the quits rate decreased. The better-than-expected report has resulted in market expectations of fewer Fed cuts in 2025. Unemployment rates have trended down across all races.

Market Update

The US stock market finished strong, making 2023 and 2024 the best consecutive two years in the stock market since the late 1990s.⁵ Policy outlook uncertainty resulted in more volatility in both equities and fixed income markets in Q4. US equities continued their outperformance in Q4 driven by the strength of the US economy, strong corporate earnings, interest rate cuts, and optimism about potential policies of the Trump administration. Investor exuberance around potential deregulation and tax cuts which could lower costs and improve profit margins were most visible immediately after the election results were announced.

Some of the exuberance faded in December as the Fed reduced its forecasts of interest rate cuts in 2025 due in large part to the uncertainty of the policy outlook and the potential impact of tax cuts, limited immigration, and tariffs on deficit spending and inflation. Developed international and emerging markets returns were negative in Q4 due in large part to a strong dollar, potential implication of tariffs, continued slowdown in China, and political turmoil in France and South Korea. 

Index Returns comparing Q4 2024, YTD 2024, 3 year data.

US markets have outperformed International Developed Markets in 10 of the last 12 years.⁶ The US equities market outperformance since the great financial crisis has resulted in the US Market capitalization in the MSCI All Country World Index increasing from 42% in 2009 to 67% at the end of 2024. The US fiscal policy response after the financial crisis and during COVID along with stronger economic growth and US dollar has benefited US companies compared to the rest of the world. The 7-percentage point increase since 2023 has primarily been driven by the rise of the Magnificent Seven stocks.

Sources: Morningstar, FRED, and US Department of the Treasury⁷

While these 7 companies have strong balance sheets and experienced considerable revenue and earnings growth, they have also benefited from the exuberance around artificial intelligence (AI). Valuation as indicated by forward P/E of MSCI USA is 21.91x as of December 2024 compared to 20-year historical average of 19.04x. The valuation contrast is even more evident in the S&P 500 index where the forward P/E as of December was 21.47x compared to the 30-year historical average of 16.86x. 

Chart: % weight in the MSCI All Country World Index, USD, monthly 2007 - 2024. Source: Morningstar

Source: Morningstar

The Magnificent Seven

The US market continues to be driven by the “Magnificent Seven.” Seven US large-cap companies – Apple, Nvidia, Meta, Amazon, Tesla, Microsoft, and Alphabet – were responsible for more than half of the gains in 2023 and 2024 with only Microsoft lagging the broader index for the 2024 calendar year. At the end of 2024, the “Magnificent Seven” represented ~34% of the S&P 500 Index weight and accounted for ~55% of the S&P 500 Index 2024 returns. As a result, concentration risk remains severely elevated in passively managed portfolios with exposure to the Mag Seven stocks. Nvidia rose ~171% contributing to ~22% of the gains in the S&P 500 in 2024. Nvidia (Technology sector) continues to benefit from outsized demand for its products due to investments in AI. Many actively managed portfolios without exposure to Mag Seven companies, particularly Nvidia which made up 6.73% of the S&P 500, have trailed their benchmark in recent years.

Treasury Yields and the Fed Funds Rate

Bond markets were mixed as shorter-duration bonds and T-bills benefited from rate cuts, but the long-duration bonds were negatively impacted by the expectation of fewer interest rate cuts and investors demanding higher yield for taking on the risk of longer-duration bonds. The inversion of 2-year and 10-yr treasury yields that started in 2022 has reversed and the 10-year now has higher yield than the 2-yr.

Chart: Treasury Yield Curve comparing 9/30/21, 9/30/24. 12/31/24 for 1, 2, 3, 5, 7, 10, 20, and 3rd year. Source: US Dept of the Treasury

Source: US Dept of the Treasury⁹

The fed funds rate and treasury yields have historically moved in tandem. That has not been the case since the September 2024 interest rate cut. The 10-yr treasury yield has been increasing instead of decreasing. Normally when the Fed lowers the fed funds rate, the treasury yields drop too; primarily because the Fed cuts rates when the economy is already slowing down and there are layoffs and reduced spending, which further drive yields down. 

In 2024, the US economy and labor market remained resilient, and the Fed cut rates before signs of a recession to preempt one and to signal to the market that they wanted to prevent deterioration in the labor market. However, the strength of the US economy and labor market along with the impact of policy uncertainty on fiscal deficit and inflation has resulted in the Fed lowering their forecasts of rate cuts in 2025. Similarly, investors are also demanding higher yields for taking on more risk for bonds with longer maturities, which is resulting in a divergence in the movement of the Fed Funds rate and treasury yield. 

Chart: Evolution of Treasury Yields and Fed Funds Rate 2019 - 2024. Comparing effective federal funds rate, 2-yr Treasury rate, and 10-yr Treasury rate. Sources: Federal Reserve, U.S. Department of the Treasury, Apollo.
Chart: % change of 10-yr yield 200 days before and after the first Fed rate cut. Sources: Federal Reserve, U.S. Department of the Treasury, Apollo.

Note – Current cycle started in September 2024. Historical average includes rate cut cycles from 1998, 2001, 2007 and 2019. Sources: Federal Reserve, U.S. Dept. of the Treasury, Apollo.

Outlook: Federal Policy and Regulation 

Donald Trump has been inaugurated, and he begins his second term as President with a Republican majority in the House and Senate, which means that many of Trump’s campaign promises on taxes, tariffs, and immigration may be implemented. Significant policy changes, like the potential changes outlined below, might result in heightened volatility and impact certain sectors of the markets more than others. Tax cuts without offset to spending can result in higher deficit and increase in national debt which could negatively impact the bond markets. Trump’s executive orders on inauguration day, selection for cabinet positions and head of federal agencies, some of whom will need to be approved by the Senate, indicate that he plans to move forward with his campaign promises.

Table: Potential impact of Trump Administration's campaign promises, executive orders, and the potential impact on various issue areas in 2025. Sources: Campaign websites, WSJ, J.P. Morgan Asset Management, and AllianceBernstein

Sources: Campaign websites, WSJ, J.P. Morgan Asset Management, and AllianceBernstein¹¹

We expect regulation of corporations, particularly in protection of the environment, worker rights, and anti-discrimination, to decline over the next four years. Some state and local governments will continue to regulate, as will foreign agencies when it comes to multinational companies. Other remaining tools include the consumer, as we choose where and how to spend our money, and impact investing.

Resilience of Impact Investing

Impact investing may face challenges in the years ahead, but we believe in its resiliency. We believe more asset owners may want to align their portfolios with their values – we expect similar trends as we saw during the first Trump administration. Corporations remain committed to ESG and climate solutions — A recent KPMG survey showed that 70% of US CEOs remain committed to their climate related strategies and see their ESG strategy having the greatest impact on driving financial performance in the next three years. European ESG regulations apply to many US companies — SFDR, CSRD, CSDDD, etc. apply to US companies that operate in Europe, even if there is pullback on ESG regulations in the US. We believe the energy transition will continue — most of the clean energy investments from the Inflation Reduction Act have been flowing into red states and the levelized cost of electricity from renewable energy sources is lower than fossil fuel.

Pie Chart: estimated clean energy investments congressional districts. 87% in red districts and 13% in blue districts. Sources: KPMG and Greenbacker Capital
Chart: Estimated Green Jobs created by IRA Across congressional districts: 28,029 in blue districts and 77,102 in red districts. Sources: KPMG and Greenbacker Capital

Sources: KPMG and Greenbacker Capital

The Path Forward

We are grateful to be in community with our clients. We stand with refugees, immigrants, transgender people and other members of the LGBTQ+ community, people seeking autonomy over their reproductive decisions, people of color, women and marginalized genders, people impacted by extreme climate events, people needing affordable healthcare, and so many more.

Policies over the next four years may favor asset holders, which could protect and even benefit the wealth of many of our clients. That said, the prior Trump administration showed us that chaos surrounding global events can impact markets. Our investment process seeks to protect your goals across multiple points in a market cycle. Your Veris advisors stand ready to help you evaluate how to best prepare your portfolio and elevate your impact in the years to come.


Authors 

Jane Swan is a Partner, Senior Advisor, and Chief Advisory Officer at Veris and she holds the Chartered Financial Analyst (CFA®) designation. Bio

Roraj Pradhananga is a Partner and CIO at Veris and a Certified Investment Management Analyst (CIMA®) and Certified Public Accountant (CPA). Bio

Sources

1. https://www.atlantafed.org/cqer/research/gdpnow

2. U.S. Bureau of Economic Analysis, FRED, and U.S. Bureau of Labor Statistics

3. BLS

4. U.S. Bureau of Economic Analysis, FRED, and U.S. Bureau of Labor Statistics

5. www.usfunds.com/resource/ai-frenzy-drove-the-sp-500s-best-two-year-gains-since-the-dot-com-era/

6. Envestnet

7. Sources: Morningstar, FRED, and US Department of the Treasury

8. Source: Morningstar

9. US Department of the Treasury

10. Federal Reserve, U.S. Department of the Treasury, Apollo.

11: Campaign websites, WSJ, J.P. Morgan Asset Management, and AllianceBernstein

12. KPMG and Greenbacker Capital


Disclaimer

The information contained herein is provided for informational purposes only and should not be construed as the provision of personalized investment advice, or an offer to sell or the solicitation of any offer to buy any securities. Rather, the contents including, without limitation, any forecasts, projections, and forward-looking statements simply reflect the opinions and views of the authors. 

All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change without notice. There is no guarantee that the views and opinions expressed herein will come to pass. Additionally, this document contains information derived from third party sources. Although we believe these third-party sources to be reliable, we make no representations as to the accuracy or completeness of any information derived from such third party sources and take no responsibility therefore. Information related to the performance of certain benchmark indices is provided for illustrative purposes only as investors cannot invest directly in an index. Past performance is not indicative of or a guarantee of future results. Investing involves risk, including the potential loss of all amounts invested.