There was no shortage of market-moving events during a very active fourth quarter. The stock market opened the quarter with a slow start in October, but the outcome of the presidential election triggered a broad rally in November. The rally faded as the year ended, although the S&P 500 was only a few percentage points below its all-time high. The bond market was equally active in the fourth quarter, with the Federal Reserve cutting rates by another 0.50%, bringing the sum of rate cuts in 2024 to 1.0%.
However, a major development was the changing 2025 outlook. Both the Fed and the market expect fewer rate cuts in 2025 compared to the end of the third quarter, which resulted in a sharp increase in Treasury yields. We had previously written about rate cut expectations being too aggressive.
This commentary recaps the fourth quarter, looks back on the 2024 stock market rally, provides an update on the economy and the Fed’s rate-cutting cycle, and looks ahead to 2025.
Looking Back on the 2024 Stock Market Rally
The past two years have been positive for equities, with the S&P 500 delivering strong returns in back-to-back years. The stock market’s rally in 2024 saw the S&P 500 set more than 55 new all-time highs. The index posted gains of over 20% in 2023 and 2024, marking the first time since the 4-year stretch from 1995 to 1998. Additionally, like the late 1990s, large-cap technology stocks played a major role in the S&P 500’s gains.
In 2024, there was a significant gap between the returns of large-cap and small-cap stocks. The Magnificent 7, a group that includes Microsoft, Apple, Alphabet, Meta Platforms, Amazon, Nvidia, and Tesla, now account for more than 33% of the S&P 500. These seven stocks collectively returned over 60% in 2024. When the group of stocks expands from the Magnificent 7 to the 50 largest S&P 500 stocks, the 2024 return falls to 32%. Broadening the group further to include all S&P 500 companies reduces the index return to approximately 23%, and weighting companies equally, rather than by market capitalization, lowers the return to 11%.
The key takeaway is that the largest companies contributed a significant portion of the S&P 500’s return in 2024. Smaller companies delivered solid returns of approximately 10%, but they underperformed on a relative basis. Also, mid-cap and micro-cap stocks returned 12%.
The concentrated stock market rally, which was driven by the outperformance of the largest companies, led to an unusual outcome. For the second consecutive year, fewer than 30% of S&P 500 companies beat the index in 2024. This is significantly below the average of 49% since 2000 and highlights the dominance of the largest companies in 2024.
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S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.
Russell 1000® Value Index: The Russell 1000® Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
MSCI Emerging Markets Index: MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of 23 emerging markets.
MSCI EAFE® Index: The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of 21 developed markets, excluding the U.S. and Canada. PM -07072026-7505454.1.1
