This past year financial markets experienced a unique new set of concerns, many different from those in recent years. After much anticipation and speculation that the Federal Reserve would cut interest rates in 2023, the rate reduction cycle was finally kicked off in September of 2024. Some warmer than expected inflation data in the early part of 2024 was cited as the reason the Fed held off cutting rates, but by late summer, inflation seemed tamer and economic data had started to look weaker. Negative revisions in the labor market numbers combined with weaker manufacturing data prompted a 50-basis point interest rate cut by the Fed in September, with a forward view of a more rapid descent in rates through the balance of the year. Some better statistics on the economic front slowed the descent to a 25-basis point drop in November with a follow up 25 basis points expected this month.
While rates were a big story for financial markets in 2024, the election was another one. Much ink was spilled in speculation with the outcome far more one-sided than originally forecast. The House of representatives has a wafer-thin majority while the Senate saw Republicans pick up a few seats. Financial markets seemed to like the outcome, pricing in many of the hopeful goodies like extended tax cuts and a more benign regulatory environment while seeming to ignore the potential inflationary forces that tariffs and a potential crackdown on immigration could unleash.
One could be forgiven, just looking at where equity indices started the year and where they sit now, in thinking it was smooth sailing throughout the year, but there were some bouts of volatility along the way. Geopolitics outside of the US election has added to global uncertainty with both French and German governments experiencing crises in confidence. The Middle East remains on edge as a tenuous cease fire between Israel and Lebanon seems to be holding, albeit by a thread. The Ukraine war and crisis is ongoing, with the country’s need for money and for arms exacerbating some of the budgetary issues across Europe, as well as in the US.
In the US there may be a budgetary reckoning sooner rather than later, as last September’s budget agreement merely continued to kick the can down the road square into the start of a new administration led by Republicans. While there has been much fanfare about the potential agenda, there may be a budgetary spanner in the works that slows down or inhibits making the US tax cuts permanent. We expect 2025 outlook pieces to include the threat of a resurgence in inflation, which could stall further easing by the Fed.
Add to the backdrop a weaker economy in China, some political unrest in Korea and a moribund Europe to the various clouds on the horizon. All of which is ongoing while US equity indices hit new highs on a daily basis; as of this writing the S&P 500 has hit 55 new highs so far this year.
The Artificial Intelligence (AI) story of 2023 was predicated on the growth of the infrastructure needed to run AI programs. That growth was delivered by semiconductors companies like NVDA and the hyperscalers like Amazon Web Services, Microsoft Azure and Google Cloud, among others. The next and highly important question from an equity market standpoint was the effect or efficiency that AI could bring to companies more broadly. What we have seen this year is a number of companies affirming that using AI tools has helped efficiency and the bottom line. This is critical for broader use and acceptance. Equity markets like a good story, and AI is proving so far to be living up to the early hype.
The positive story of AI bringing new efficiencies and productivity and therefore earnings growth is set against an uncertain backdrop economically. While the AI framework is helpful to markets, we will need to see more companies using the technology and illustrating economic benefit as we look into 2025. Earnings growth is a driver of equity performance, and it could be argued that a lot of growth is essentially “built-in” to equity valuations at these levels. If it looks like growth is slowing, markets could have a negative reaction.
The US House of Representatives has a very slim margin for Republicans, so it is not yet clear what legislation could be passed and when, but the outlook for 2025 and beyond could be impacted by any major changes in US policy. There are some obvious winners and losers, with defense and US manufacturing seen as beneficiaries and alternative energy and companies that may be affected by tariffs or immigration among the latter. Earnings and the economy are likely to be the most important market drivers but can also be impacted by politics as well. We continue to look for companies with strong financials, good management and growing markets. We also caution that after two years of above average returns and a market continuously making new all-time highs, equity markets may not be able to complete a hat trick in 2025. Absent a negative catalyst, we are not necessarily looking for a major correction, just cautious after such strong recent returns.
Wishing you a prosperous 2025 from all of us at Alpine Saxon Woods!
The views expressed are those of the Alpine Saxon Woods, LLC management team as of the date indicated, and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Performance data quoted represents past performance and does not guarantee future results. All data referenced are from sources deemed to be reliable but cannot be guaranteed. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.
