Happy New Year!
As we welcome 2025, it’s a great time to reflect on the wild ride that was 2024. From the twists and turns of the stock and bond markets to the shifting political landscape, this past year gave investors no shortage of things to talk about—or worry about. Let’s break it down and also look ahead to what might be in store for us this year.

Stocks in 2024: Explosive US Growth
2024 was a banner year for stocks, with the S&P 500 surging 25%—a performance that few saw coming after the challenges of prior years. Fueled by the relentless momentum of artificial intelligence and technological innovation, the NASDAQ outpaced all other major indices, climbing over 28%.

While U.S. markets roared ahead, global stocks struggled to keep pace. Emerging markets were weighed down by uneven economic recoveries, weaker currency performance, and geopolitical tensions, leaving them trailing behind the explosive gains seen in our country. Developed international markets posted more modest returns, grappling with slower growth and ongoing inflation concerns.

At the center of the US rally were AI leaders like NVIDIA (NVDA), which skyrocketed by 171%, and Microsoft (MSFT), which capitalized on the AI revolution through its integration of advanced machine learning tools. Even Apple (AAPL), after a subdued first half of the year, delivered a stunning late-year surge to reclaim its top spot back from NVDA as the largest component of the S&P 500.

With this in mind, domestic stock gains were concentrated, with the top five tech companies contributing a disproportionately large share of the overall performance. This narrow leadership created a stark contrast between the high-growth tech sector and lagging areas like utilities and real estate, which continued to feel the effects of elevated borrowing costs.

For investors in index funds like us, the concentrated nature of the rally was a double-edged sword. While NVDA’s explosive growth helped lift portfolios across the board, the lack of participation from other sectors and global stocks raised questions about the market’s sustainability. As we head into 2025, the key challenge will be whether this rally can broaden out or whether it remains overly reliant on a few dominant players.

Bonds in 2024: A Mixed Bag
Bonds had a more nuanced year in 2024. While moderate and longer-duration bonds mostly eked out very small gains, shorter-duration bonds and Treasury bills outperformed:

Short-term bonds, like the Vanguard Short-Term Bond ETF (BSV), delivered better returns as investors sought safety from rate uncertainty.
Treasury bills (tracked by ETFs like BIL) were the real winners, benefiting from their ability to adjust quickly to rate cuts and offering attractive yields. However, their attractiveness has been dwindling as the Fed rate cuts continue.
Overall, bond performance reflected the market’s uncertainty about the Federal Reserve’s direction. Longer-duration bonds struggled to keep positive momentum, while shorter-duration bonds provided steadier returns. For investors like us, this underscored the importance of diversification and a well-constructed fixed-income strategy with a mix of durations. The aggregate bond index extended its drawdown streak to 53 months—the longest in history.

Municipal bonds also became a hot topic late in the year as high earners prepared for potential changes to the tax code. With the 2017 Tax Cuts and Jobs Act set to expire in 2025, there’s some uncertainty about where marginal tax rates and deductions are headed. We’ll come back to that shortly, but suffice it to say: tax-efficient investing will remain a priority in the coming year.

The Fed’s (Belated) Pivot
If 2024 had a theme, it was “waiting on the Fed.” For the first half of the year, Jerome Powell & Co. kept rates steady as inflation data slowly improved. By September, with inflation hovering near 2.5%, the Fed finally blinked and announced its first rate cut in over three years.

The market’s reaction? Relief, followed by a collective shrug. Investors had already priced in rate cuts by midyear, so the actual announcement didn’t move markets much. What did matter was the Fed’s messaging: Powell emphasized that cuts would be measured and gradual, leaving the door open for future adjustments if inflation ticks back up.

For now, the era of high rates appears to be ending, but don’t expect a return to the near-zero levels of the 2010s. A “new normal” of 3-4% rates could be the sweet spot for a healthier, more balanced economy. It also leaves room to reduce rates further if an economic crisis were to arise.

Key Themes to Watch in 2025

  • Corporate Earnings: Will companies outside of tech finally start to show growth, or will earnings disappointments become the new normal?
  • Fed Policy: Rate cuts may continue, but how quickly and by how much remains unclear. Too much easing could reignite inflation, while too little could stifle growth.
  • Tax Policy: Expect a lot of noise—and potential market volatility—as Congress debates the future of the TCJA.
  • Geopolitics: From ongoing tensions with China to the ripple effects of the Ukraine war, global events will continue to shape the market narrative.

This post is an excerpt from a private client newsletter on 1/1/2025.