A busy end to the year – December 2024
An expected 25bps rate cut set a hawkish tone, although the usual positive seasonality didn’t materialize and the final days of the month saw a negative trend.
Introduction
December is always a busy month leading up to Christmas as it feels everybody is trying to get everything done in fewer weeks than normal. The main focus for the month was the final FOMC meeting for 2024 where there was no surprise with a 25bps rate cut although the tone leant more hawkish.
There was also a lot of news flow around a potential Government shutdown as President Trump and even Elon Musk from a DOGE perspective tried to influence Republicans voting. The shutdown was averted at the last minute although the legislative and administrative outlook is more uncertain and we can anticipate this being a key theme in 2025. The election outcome has removed some uncertainty but there are new areas to be monitored from tariffs through to domestic policy. Trump’s rhetoric around Mexico and Canada tariffs has toned back after discussing with the respective leaders.
From an economic perspective the CPI reading for November was largely in line with expectations, with shelter coming in slightly softer than expected which was well received by the market. The labour report also saw strength in a non-farm payrolls beat although unemployment rate ticked up to 4.2%. PCE was slightly below expectations so inflationary pressures continue to ease although this did not give the Fed license to create further cutting expectations.
Generally the markets took a more defensive tone in December and the normally positive seasonality didn’t materialize. At one point a Santa rally appeared to be taking place although the final days of the month saw a negative trend. However, overall it has been a very strong year for the US equity market and this is likely some profit taking as participants look to position for 2025.
The local market also saw pressure in December after a better year following a favorable political outcome. Should this momentum continue into positive reform then the local market could see strong performance in 2025. A key factor will be unlocking confidence in the private sector to see longer term investment.
Overall in 2025 we can expect to see continued focus on geopolitical tensions, inflation and central bank policy. The US debt position will also face further scrutiny as Trump looks to implement his tax breaks and policy changes. We anticipate more volatility in the coming year and so managing portfolios accordingly will be critical.
Macro Environment
As focus shifts to 2025 the global macro strategists have all been pushing their forecasts for what to expect from the S&P500 in 2025. Before looking at 2025 it is worth reviewing how these experts went in 2024. Even the most bullish forecasts did not get close to the 2024 year end target and even following adjustments through the year the strategists were still largely off. This shows how unexpected 2024 was from a returns perspective and that the expected macro outlook didn’t play out as expected. It is also a key reminder why sometimes following the herd is the wrong decision. The chart on the next page shows the forecasts that were done a year ago for the 2024 S&P500 target and how far off the end result actually was.
Looking at the outlook for 2025 the average S&P500 target currently sits at 6 588 which is upside potential of about 12% from the end of December close. The low estimate currently sits with Jefferies who have a price target of 6 000. Wells Fargo is the most bullish with a target just above 7 000. However this range is actually the tightest since 2019. Looking back the 2024 targets were an undershoot of 28%, the 2023 were an undershoot of 17% and 2022 was an overshoot of 25%. So based on recent track record these targets should be taken with a pinch of salt and it is important to remain dynamic and manage portfolios as the economic outlook and company fundamentals change over the course of the year. A key underpin of the price target is earnings which we are watching very closely.
Asset Allocation
Our local asset allocation remains unchanged as we head into 2025. Our offshore asset allocation also remains unchanged as we down weighted positions in November and will reassess allocation as we move into the New Year and there is more clarity around the new political administration in the US . We have maintained bond allocation despite the recent volatility. In addition, we have been adding to our Structured Notes position as an effective way to maintain equity exposure while providing some hedged protection with the US market looking a little stretched.
Market Performance
December was a weaker month for markets off the back of November strength. During the month of December, the S&P 500 ended down 2.5%. The MSCI World index was down 1.99% for the month and the JSE saw a negative return of 0.49%. As per chart below the YTD performance of the JSE is up 9.37% (in ZAR), while the S&P500 is up 23.31% and the World index is up 19.33% (in USD), respectively.
Bonds
Bonds are garnering a lot of attention in some circles as they see an increase in volatility and the main focus is on the 10 year which has seen a significant back up as expectations around the path of rates and a potentially higher R* which is the long term rate is being digested. This volatility has not necessarily played out in equity markets but as we have written about before there is an indirect relation between yields and valuations and so this is an area we will be watching closely in 2025. As the chart below reflects, the 10 year yield has moved around a lot in the past few months.
Equities
The expectation for equity earnings going into 2025 is high. The current calendar year estimate for 2025 earnings is a growth of 14.8%. This is well above the 10 year average of 8% and is part of the reason that the market is stretching valuations. The famous Magnificent 7 is expected to produce earnings of 21% while the remainder of the index is expected to see growth of 13%. This is a substantial improvement over the expected 4% in 2024. Currently analysts expect all sectors to produce growth in the coming year with information technology once again being the stand out at greater than 23%. As outlined by the chart below the lowest growth is anticipated in the energy sector at 3.6%. Revenue growth is expected to be slightly slower generally with energy the one sector expected to go backwards on a revenue basis. The Net Profit Margin is also expected to expand in 2025 to a very healthy 13%. Overall this paints a very positive picture for earnings this year. We do feel a lot of this is already in the price and so the expectations have been set and it will largely come down to whether companies beat or miss. We anticipate the theme of misses being punished harshly to continue as the stretched valuations do not leave much room for disappointment. On the other hand, a big beat on the current lofty expectations will also be rewarded. We will be monitoring the companies in our portfolios very closely and adjusting positions accordingly.
Conclusion
We are starting 2025 with a slightly cautious approach after two years of strong performance in portfolios. We think the upside and downside risks are currently fairly balanced and as President Trump comes into office we will be watching to see what his administration looks to implement urgently and what might have been campaign talk. The local market could also present interesting opportunities as local companies remain bullish on the political landscape. As always we remain available for our clients to discuss the outlook for the year and our current portfolio positioning. We hope everybody had a good Festive break and are feeling ready to take on 2025.