The overall performance of global financial markets roundly exceeded expectations in 2024, as measured by strong investment returns enjoyed by stock investors or gauged by healthy GDP growth rates of major economies around the world. As in recent years, the U.S. market continued to be the beacon of market strength, producing results superior to those of their European and Asian peers. American stock indices have recorded numerous highs throughout the year, including a 27% increase year-to-date for the S&P 500, as markets were propelled by a bullish third quarter earnings report that marked a fifth straight quarter of profit growth. Importantly, the U.S. consumer, whose spending accounts for 70% of the overall economy, exhibited increased confidence during the year thanks to said stock market gains as well as the Federal Reserve’s recent pivot to lower interest rates.
At the beginning of the year, many economists had predicted a slowdown or contraction for American businesses. Instead, the U.S. economy delivered a powerful trio of strong GDP growth, moderating inflation, and a robust job market (which was reaffirmed by the 227,000 new jobs created in November). A great deal of this success is the result of a new-found, technology-led productivity boom that has boosted growth for large and small businesses alike. Some credit for this economic success can also be attributed to the Jay Powell-led Federal Reserve, who has orchestrated well-timed interest rate cuts, fostering both price stability and low unemployment in the economy. Policy makers in Europe and China, however, have not been as adept guiding their own economies, as Europe has suffered through an extended period of economic stagnation while China’s all-important real estate market continues its slide.
For equity investors, the unbridled excitement around artificial intelligence (AI) has been reflected in the parabolic share price rise of AI related stocks (primarily in the semiconductor industry). Like earlier transformative inventions involving the internet and mobile phones, AI is expected to enjoy a period of widespread adoption that could endure for years. Investors who are bullish about the prospects of these innovative technologies point to a wider adoption of AI across other sectors in the economy, as well as the potential for AI to increase productivity and profitability for organizations and businesses around the world.
Taking a broader view of the global economy, there are risks on the horizon as we transition into 2025 and beyond. Record amounts of sovereign debt (i.e., government debt) being amassed in Europe, Asia, and the Americas, are a high concern given the lack of political will to address the growing problem. In the U.S. alone, the national debt has reached $35 trillion, bringing with it the substantial burden of interest payments now exceeding 18% of our federal tax revenues (an amount greater than the U.S. defense budget). On a separate note, an additional geopolitical risk is the ongoing conflict in the Middle East and in Eastern Europe. Both wars could expand in scope, causing consternation and worse for all involved. Lastly, a concern closer to home involves the all-important real estate market, where rising mortgage rates, now eclipsing 6.8%, have pushed housing activity to its lowest level since 1995.
With a new Trump Administration getting underway in January, investors will be evaluating the various GOP policies that could influence economic conditions, such as fiscal spending, business regulations, and tax policy. The potential threat of tariffs, including the proposed 60% tolls on Chinese imports, would represent trade levy amounts not seen since the 1930’s Smoot-Hawley Tariff Act which was in response to the Great Depression. Trade wars notwithstanding, the near-term outlook for the broader U.S. economy remains favorable, with real GDP growth of 2- 3% expected in the year ahead. Recent data points over the holidays have also been promising as shoppers spent a record $10.8 billion online during Black Friday. Other pro-business policies from the Trump Administration and Congress are anticipated as the New Year gets underway. With stock investors having enjoyed astounding annual returns of near 13% over the past decade, the U.S. economy will need to be hitting on all cylinders in the New Year to satisfy the lofty expectations that shareholders have set for the markets.
