2024 was a great year for the US stock market with the S&P 500 gaining 23%. It seemed that everything went in the market’s favor, even when it didn’t. The market had an uncanny ability to either ignore every negative event or spin it into something positive.
The yield on the 10-year US Treasury went up markedly during the 4th quarter which typically causes a rough time for equities, but rates rose in conjunction with a rosier economic outlook. Inflation continued to stubbornly stay above the Fed’s 2.0% target, but it did drop from 2.7% at the end of 2023 down to 2.4%. Russia’s war with Ukraine grew more intense but remained contained. The conflict in the Middle East seemed poised to escalate, but again stayed relatively contained. The unwinding of yen-based carry trades caused a notable pullback, but it was short lived.
Regardless of the bumps along the road, the journey didn’t matter as much to investors as the destination. For the second straight year, the market cap-weighted S&P 500 achieved a 20%+ return.
However, this does not tell the whole story as the median stock underperformed the index, leaving many investors disappointed with their portfolio’s performance in 2024. The equal-weighted S&P 500 underperformed its market cap-weighted brother by 12%! This was especially noticeable in the technology and communication sectors where the gap between the two indices was over 20%. The reason for the large discrepancy is that nearly half (46%) of the annual return of the S&P 500 in 2024 came from 5 stocks (NVDA, AAPL, AMZN, GOOGL, AVGO).
The aforementioned mega-cap stocks assumed a leadership position that they only ceded sparingly at times. These stocks share many positive qualities in common such as their financial strength, quality of their leadership, and dominance within their industry. All these qualities aside, the dominant factor in their performance throughout 2024 was their leadership within AI. This thematic, more than any other, seemed to be the underlying factor in the market’s move in 2024.
No stock exuded the AI leadership quality better than NVIDIA (NVDA), which was at the center of every AI conversation because its GPUs are at the center of data center buildouts, large language models, and generative AI. This created a halo effect on many other stocks that had a toe in the AI revolution.
A lot of enthusiasm over AI got priced into those stocks in 2024, begging the question of whether they have gotten ahead of themselves and now face what could be impossibly high expectations going into 2025. Certainly, some of the stocks within AI that moved on hype with little substance could see a correction in 2025, but those that proved robust earnings growth and can sustain it in 2025 are poised to continue upwards.
Date of report: January 8th 2025