Monthly Market Update - January 2025


Highlights:

  • Despite a December dip (-2.4%), the S&P 500 delivered a strong 25% gain for 2024, driven largely by the “Magnificent Seven” tech giants, which contributed 53% of the year’s return.
  • IT and Communication Services led sector performance, while Financials and Consumer Discretionary beat the overall market. Growth stocks outperformed value, and large caps overshadowed small caps.
  • Lower inflation, 100 basis points of Federal Reserve rate cuts, solid GDP growth, and AI optimism contributed to strong market performance in 2024. 
  • The 2025 outlook is positive, fueled by strong U.S. consumer spending, potential Fed rate cuts, and pro-business policies, but risks like high valuations, tariff and immigration uncertainty, and high long-term interest rates remain.

Despite a dreary December (S&P 500 Index down -2.4%), stock investors had a banner year, up 25.0% for 2024. In a now familiar refrain, rewards were not equally distributed, with the large-cap tech companies known as "The Magnificent Seven" earning 53% of the Index's return for the year. Sector returns fluctuated across the year but ended up with some breadth as seven of the eleven produced double-digit gains. The Mag 7 leaders put Information Technology and Communication Services at the top of the leaderboard, but both Financials and Consumer Discretionary beat the overall market. The laggards were Real Estate, Energy, Health Care, and Materials. Growth stocks outperformed value across capitalization ranges, while small stocks were left in the wake of large caps. Bond returns suffered from persistent mid-and-long yield elevation but added modestly to annual gains in balanced portfolios. 

The earnings picture for the year revealed the favored stocks in 2024 were not just hype. In 2024, the average earnings growth rate of Mag 7 stocks was 33.3%, while the rest of the Index averaged just 3.3%. Late in the year, earnings expectations for the fourth quarter dipped, a factor behind the negative returns for December. More relevant was the December softening of Federal Reserve rate cut projections. Earnings expectations for 2025 show a slowing trend for the Mag 7 stocks but considerable expansion in earnings for the rest of the market. If so, this could provide sustenance to the long-held expectations for a broadening of market returns. Earnings were just one of the drivers of the market in 2024, with lower inflation, 100 basis points of Federal Reserve cuts, solid GDP growth, and optimism over artificial intelligence all contributing. 

The consensus outlook for 2025 is positive, fueled by the continued strength of the U.S. consumer, the prospect for further Fed rate cuts, and the confidence in pro-business Trump policies. Undermining this optimism are high valuations and uncertainty over the Trump administration’s actions regarding tariffs and immigration. The persistence of high longer-term interest rates in the face of Fed cutting projects a possibility of a more troubled economy in 2025. 

While the market has largely shrugged off geopolitical threats, including the Mideast war and North Korea joining the fight in Ukraine, this ambivalence does not mean that we are free from shock waves, particularly when it comes to a potential trade war with China or a China/Taiwan conflict that could disrupt the world’s semiconductor chip supply. Thus far, the slowing growth in China and the widespread political turmoil in France, Germany, South Korea, and Canada have not negatively impacted U.S. markets. We believe the economic support of the multi-trillion dollar federal deficit spending over the past four years has been an underappreciated aspect of the economy that has countered the Fed’s monetary tightening. Ironically, if the new Department of Government Efficiency is successful in its goal of cutting over a trillion dollars in annual federal spending, this achievement could end up causing a near-term contraction in the U.S. economy. From our perspective, proceeding into 2025 with a clear-eyed view of risk is essential as the heady stock market returns of 2023 and 2024 have moved risk far from the forefront for many investors. 

“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC (“MAM”), and Madison Investment Advisors, LLC (“MIA”). MAM and MIA are registered as investment advisers with the U.S. Securities and Exchange Commission. Madison Funds are distributed by MFD Distributor, LLC. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer and is a member firm of the Financial Industry Regulatory Authority. The home office for each firm listed above is 550 Science Drive, Madison, WI 53711. Madison’s toll-free number is 800-767-0300.

Any performance data shown represents past performance. Past performance is no guarantee of future results.

Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations of, or guaranteed by, any financial institution. Investment returns and principal value will fluctuate.

This website is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only, and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.

The S&P 500® Index is an unmanaged index of large companies and is widely regarded as a standard for measuring large-cap and mid-cap U.S. stock-market performance.

The federal funds rate is the target interest rate range set by the Federal Open Market Committee (FOMC) for banks to lend or borrow excess reserves overnight. It influences monetary and financial conditions, short-term interest rates, and the stock market.

The Magnificent Seven stocks are a group of high-performing and influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.

A basis point is one-hundredth of a percent.

Upon request, Madison may furnish to the client or institution a list of all security recommendations made within the past year.

Diversification does not assure a profit or protect against loss in a declining market.