Insights into key market performance and economic trends from Dan Kemp, Morningstar’s global chief research and investment officer.
Large-Cap Growth Stocks Again
Despite declines in prices over December, 2024 delivered a second year of strong gains and stocks now remain a little expensive as we head into 2025. The relative movement in US stock prices over the month reflected established trends with large companies faring better than mid-cap stocks or small-cap stocks. In terms of style, technology-enabled growth stocks fell less than traditional value companies down.
Inflation Concerns Simmer
Bond yields rose sharply over the month with the 10-year Treasury bond ending up 0.3 percentage points at 4.5% and 0.6 percentage points higher than the start of the year. The correlated declines in equities and bonds alongside the latest interest rate forecasts from the Federal Reserve were seen as indicating growing concerns about inflation. However, it is worth noting that traditionally inflation-sensitive sectors such as basic materials and energy both fell further than the broader market and consequently inflation concerns may be less of a factor then they first appear.
Beware of Market Forecasts
The ongoing concentration of the highest returns in a small part of the market continued to widen the gaps in expected returns and test the patience of independently minded investors who are increasingly seeking a catalyst for a change in market leadership. Unfortunately, such catalysts are only ever widely recognized with the benefit of hindsight. While an individual market commentator may successfully identify a change in sentiment, such forecasts are being made constantly and are more likely to be instances of correlation then causation.
Reacting to each such identification would result in constant changes with few, if any, gains. For those who wish to benefit from the opportunities provided by the valuation gaps in the current market, there is consequently no alternative to the patient application of a process that identifies such gaps and allocates capital to them as they increase. To read more about the impact of this concentration check out Bella Albrecht’s article on the topic here.
US Dollar Gains
The recent trends did not persist in every market as US stocks trailed other developed markets and emerging markets despite a 2.6% rise in the US dollar over the month. Morningstar analysts continue to see opportunities for investors in these markets. For more information, check out our Q1 2025 Europe Equity Market Outlook released this morning.
Tesla Under Pressure
One of the most dramatic turnarounds over the month was the rise and subsequent decline in the price of Tesla TSLA. Having reached a high of $483 it subsequently declined 15.5% to end the week at $408 following news that deliveries had fallen in 2024. You can read more about these latest production results and how it is impacting our view of Tesla here.
Trump Part 2: What Investors Should Do
Political uncertainty is likely to be a feature of the year ahead. As we contemplate the impact of the new administration, it is important to remember that politicians don’t always do what they say and don’t always get what they want. The change to the fundamental value of businesses is therefore likely to be less than the boosters or doom-mongers would have us believe. To help us navigate this transition, Aron Szapiro, Morningstar’s head of government affairs has written an investor’s guide to the next Trump administration which you can access here.
Jobs Report in Focus
Following the policy uncertainty arising from the last Federal Reserve meeting in December and subsequent price movements, economists will be eagerly watching the first US employment report of 2025. This could lead to some volatility in a week shortened by the closure of market to honor the memory of former President Carter on Thursday. You can catch up on all of next week’s releases on this calendar.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
