Reviewing 2024 and Previewing 2025: Perseverance, Concentration, and Valuation

This 2024 market review piece has been contributed by Conor Feldmann, Sr. Portfolio Manager & Shareholder, as a part of his blog Demystifying Markets. To read more on current events and market analysis from Conor, subscribe to Demystifying Markets here.

Constructing and managing portfolios for our clients requires a high degree of technical expertise—the seven CFA charterholders on our team would’ve wasted a lot of time and effort if it didn’t. But at the core of our strategy is a straightforward premise: investing is simple, it’s just not easy. Here are the basic steps: 

  • Determine an allocation of stocks, bonds, and cash that aligns with your spending goals and perceived risk tolerance. 
  • Achieve that allocation through low-cost, tax-efficient, diversified funds. 
  • Occasionally rebalance back to your target allocation to prevent too much drift. 

Follow those steps and almost anyone will experience investing success. So simple. But here comes the hard part… Are you sure you want to own stocks when the largest component of our economy, the housing market, is completely broken? 

Or when inflation is persistently high, forcing the Fed to maintain elevated interest rates? 

How about during our election season whirlwind? Starting with the halting first presidential debate, followed by a near assassination, a tumultuous candidate swap, a second assassination attempt, and concerns about election integrity, the political landscape hardly inspired confidence.  

Internationally, the war in Ukraine raged on while violence expanded in the Middle East as Israel advanced on Hezbollah and endured missile strikes from Iran. In just 11 stunning days, the 54-year reign of Assad’s regime in Syria collapsed. A surprise interest rate hike by the Bank of Japan caused the Japanese stock market to plummet nearly 20% over two days. China continued to struggle with a slowing economy and, in turn, increased cooperation with Russia, Iran, and North Korea.  

I could go on but suffice it to say: The world was as risky and uncertain in 2024 as ever.  

And yet, those who followed the three steps above are probably enjoying portfolios near all-time highs. The steps are simple, but enduring risks to earn the reward is not easy. Kudos to our clients who were able to stay the course. 

Now let’s look at the most important storylines in the market today. 

S&P 500 Concentration 

The S&P 500 was led by the largest stocks in the index. The “Magnificent Seven” (Apple, NVIDIA, Microsoft, Amazon, Meta, Tesla, and Alphabet) had an average return of 60%, easily topping the index’s overall return of 25%. As a result, the index is as top-heavy as it has ever been.  

The Magnificent Seven comprises about 34% of the S&P 500. (In comparison, Truepoint and Commas clients have roughly 11% of their equities in the Magnificent Seven. Clients with fixed income exposure have proportionally less).  The next 15 largest stocks are cumulatively 16% of the index. That means that half of the index is in just 22 stocks, with the remaining 480 stocks making up the other half.  

The S&P 500’s recent run of abnormally strong performance may have some investors wondering why they’d bother diversifying into other areas of the market. But we’ve always espoused diversification to Truepoint and Commas clients. As the saying goes, it’s the only “free lunch” in investing, allowing investors to reduce risk without sacrificing expected returns. Given the top-heavy nature of the S&P 500, and the high correlation among the growth-oriented and tech-adjacent Magnificent Seven stocks, investors who are all-in on the S&P 500 will eventually realize the benefits of diversifying further into mid-cap, small-cap, and international stocks.  

S&P 500 Valuation 

Another by-product of the market’s concentration is the effect on the index’s valuation. The primary valuation metrics for the S&P are all well above their long-term averages: 

Focusing on a single metric as a point of comparison, the Price to Book of the S&P 500 is currently 4.47x. For Truepoint and Commas clients, it’s nearly 25% lower at 3.36x. Our belief, backed by academic research and real-world data, is that tilting the portfolio towards stocks with lower valuations will lead to higher expected returns in the long run. 

It’s important to note that while we believe that buying less expensive stocks will lead to higher future returns, too many investors mistake valuations as a tool for market timing. Elevated valuations are not a reason to reduce equity exposure before a predicted market decline—high valuations can lead to lower returns over the long term (think 10+ years) but are not reliable predictors of returns over shorter periods.  

Expectations for 2025 

If you’re a consumer of mainstream financial media, you’ve probably already heard dozens of expert forecasts on where the market is heading in 2025. These predictions are great fodder for clicks/views, but should be strictly considered for entertainment purposes only

Strategists have a long and laughable history of coming nowhere close to predicting the market’s return over a calendar year. 

While I can’t deny the touch of schadenfreude that I get from that graphic, the main reason I include it is to acknowledge that these strategists have an impossible task. Stocks are way too volatile and one year is far too short of a period to predict the market with any amount of precision. Since 1926 the average annual return of the stock market is about 10%, making 8-12% a popular range for prognosticators. But the market’s actual return has only fallen in that range in six of the last 99 years! Historically, stocks have about equal odds of losing money over a calendar year as they have of returning over 20%.  

Ditch the guessing game for 2025 and embrace some broad expectations rooted in historical precedent:  

  • Stock prices will erratically dart around each day. 
  • Prognosticators, financial journalists, and commentators will craft compelling narratives around the market’s seemingly random movements and confidently predict what will happen next. 
  • At some point in the year, without prior notice, stocks will decline 10-15%. 
  • Despite the chaos that ensues in the meantime, there’s a 75% likelihood that the S&P 500 ends the year higher than it started. And nearly 90% odds that it’s higher by the end of 20291

As always, please reach out to your primary advisor with any questions. Thank you for your continued trust in our firm—we look forward to serving you in 2025! 

1 Based on monthly U.S. stock returns from January 1927-September 2024. U.S. stocks are represented by the Market Portfolio from Ken French’s data library. 

Truepoint Wealth Counsel is a fee-only Registered Investment Adviser (RIA). Registration as an adviser does not connote a specific level of skill or training nor an endorsement by the SEC. More detail, including forms ADV Part 2A & Form CRS filed with the SEC, can be found at TruepointWealth.com. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice. The accuracy and completeness of information presented from third-party sources cannot be guaranteed.

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