Each month we ask clients to spend a few minutes reading through our newsletter with the goal of raising their investor IQ. We are focusing January’s Timely Topics on a quick recap of 2024 and a look forward into 2025.
- 2024 Recap
- S&P 500 Targets
- Planning Changes in 2025
- New Year’s Resolution
- NSAG News
- Where will the stock market go next
2024 Recap
Before we kick off our conversation on 2025, let's quickly review what drove markets in 2024. In the U.S., large-cap growth and technology led the stock markets. The financial sector rose by 30%, followed closely by the technology sector at 29% and utilities at 22%. All 11 sectors had positive performance, with materials, health care, and real estate being the lowest (+3.7%, +4.7%, and +4.8%). Market breadth improved compared to 2023 but was still below the 25-year average. Mid-cap and small-cap stocks gained 15.3% and 11.5%, respectively, and 28% of S&P 500 constituents outperformed the index, which is slightly better than in 2023. The S&P 500 Index rose 25% in 2024.
International markets outside of the U.S. experienced volatility throughout the year but ended broadly positive. Developed international stocks (MSCI EAFE) increased by 12%, while emerging markets saw a rise of 14%. Currency fluctuations continued to pose challenges for these markets, with the U.S. dollar index appreciating by 7% during the year, primarily post-election. In late summer, the Chinese Communist Party and the People's Bank of China introduced an array of fiscal and monetary stimulus plans aimed at rejuvenating their economy. As the world’s second-largest economy, both developed and emerging markets stand to benefit significantly from this potential resurgence. Although international markets initially reacted negatively to the election of President Trump, we believe this reaction to be overly pessimistic. Tariffs are likely to remain largely a negotiation tool, and ongoing export controls on advanced U.S. technology will likely drive innovation in other nations.
The U.S. economy continues to be strong broadly. The unemployment rate is at 4.2% and real wage growth is once again positive. We can see the strong economy reflected in treasury rates, which rose by 70 basis points from 3.8% to 4.5% in the year despite the Federal Reserve cutting their policy rate by a full 1%. This is primarily due to longer term rates (10 year) being more influenced by economic factors rather than central bank decisions. This has continued to weigh on long-duration bonds and why we continue to recommend short-term bonds for clients. For long-term rates to meaningfully move down, we would likely need to see economic hardships, such as a recession.
S&P 500 Targets
At the commencement of each year, it is customary for NSAG to examine the one-year targets for the S&P 500 provided by major banks and financial institutions. The table below summarizes the 2025 projections for the S&P 500 Index from these entities. Notably, Oppenheimer and Key Bank have set the highest targets among their peers at 7,100. Given the closing index price of 5,882 on December 31, 2024, this forecast suggests an anticipated upside of 20% in 2025. Conversely, the lowest target of 6,500 is frequently observed, with JP Morgan, Goldman Sachs, Citi, and Morgan Stanley all projecting this figure, indicating an upside of 10%. On average, taking all projections into consideration, the target is approximately 6,692, which suggests an overall upside of 14% for the S&P 500 in 2025.
We advise clients to view these estimates cautiously. Historically, targets have been inaccurate compared to actual results on a yearly basis. The market often overestimates S&P 500 returns. Over the past 20 years, the average annual return estimate has been ~12.3%, while the actual average is about 10% (see dashed lines in the table below).
While the long-term delta between actuals and estimates is -2.3% (10% - 12.3%), the spreads are much wider and more volatile on a year-over-year basis. In fact, the standard deviation of actual returns minus estimated returns over the past 20 years is ~17%. What does this number mean? From a statistical standpoint, this means that there is a 32% probability that the estimated return for the S&P 500 will be off by 17% or more in any given year (either to the upside or downside). To put this in simplified terms, it proves our statement that these targets tend to be inaccurate.
Let’s take this analysis one level deeper and remove outlier years. In 2008 and 2022, the market overestimated returns by 54% and 30%, respectively. In both 2021 and 2024, the market underestimated returns by 19%. When removing these four years, the volatility drops to ~8%. The gap has narrowed, but targets still remain inaccurate in our opinion.
2025 Planning Changes
In the table below, we’ve summarized the changes in contribution limits for various types of retirement accounts from 2024 to 2025. One of the biggest additions to 2025 is those age 60 to 63 can contribute an additional $11,250 in 2025 in place of the $7,500 for those age 50 or older. To view North Star’s full 2025 and 2024 tax guide, click HERE.
New Year’s Resolutions
As we head into 2025, most of us will focus our new year’s resolutions on areas such as diet, fitness, and savings. At NSAG, we see many ties between what it takes to improve each of these distinct areas of our lives.
Consistency and discipline are cornerstones for achieving long-term success in all areas of life, particularly when it comes to fitness, diet, and savings. In fitness, it’s easy to become discouraged when results don’t come quickly, but those who remain consistent with their workouts over time will begin to see gradual improvements in strength, endurance, and overall health. The key is to keep showing up, even when motivation wanes. Over the weeks, months, and years, small, steady progress builds up, and the cumulative effect of that effort becomes undeniable. Likewise, maintaining a balanced diet doesn’t yield instant results, but consistently making healthy food choices can lead to lasting improvements in energy, weight management, and disease prevention.
The same principle applies to saving money. At first, putting aside small amounts may seem insignificant, but over time, those small deposits add up. The discipline of saving regularly, regardless of immediate results, is what lays the foundation for future financial stability. By sticking to a budget and making thoughtful spending decisions, the compounding effect of savings begins to take shape. This consistency leads to financial growth, where even modest contributions accumulate and result in a substantial sum down the road. In 2024, NSAG rolled out a new budgeting tool called Monarch, which allows clients to easily track their expenses in a detailed manner over time. This tool is offered for free to all clients through NSAG.
When we look at investing, the compounding effect operates in a similar way. Consistently investing, even in small amounts, can lead to exponential growth over time. The earlier you begin, the more time your investments have to grow and compound. Each contribution made to your investment account doesn’t just add to the principal amount—it also earns interest, which then earns more interest. Over years and decades, this compounding effect accelerates, turning what may seem like small, insignificant investments into a substantial portfolio. Just as discipline in fitness, diet, and savings can yield long-term benefits, the consistency of regular, well-planned investments can lead to wealth accumulation in a way that compounds and builds on itself, providing a strong financial future.
NSAG News
Congratulations, Forrest, on officially becoming a Certified Financial Planner™ (CFP)!
While Forrest had already passed his CFP exam in November last year, he still had to fulfill 4,000 hours of qualifying work experience under a current CFP (Mark Kangas). As of 12/4/2024, his hours have been fulfilled. This accomplishment reflects his dedication, hard work, and commitment to excellence in the industry. Becoming a CFP is no small feat, and we all know the effort you’ve put into not only meeting but exceeding the standards required for this prestigious designation.
Your passion for financial planning and your ability to provide expert guidance to clients has always been evident in your work. This certification is a well-deserved recognition of your expertise and dedication to helping others secure their financial futures. We're excited to see you continue growing, and we are proud to have you as part of the NSAG team.
Where will the stock market go next?
While minor, last month the U.S. stock markets bucked its seasonal trend of positive Decembers. Most of the downside volatility was triggered by the FOMC meeting on December 18th where federal reserve officials signaled a lower total amount of rate cuts in 2025 than was previously expected in the market. With a resilient economy, this is likely the logical move by the Fed, although they still lowered their target rate by a quarter point at the meeting. Small cap stocks were broadly outperforming in November post-election on the back of expected regulatory cuts and continued onshoring. Although, the upward pressure in rates during December has unwound this outperformance. From 10/31/204 – 12/31/2024, small caps are flat while large cap stocks are up 2%. Looking forward, we believe the tailwinds of regulatory cuts and onshoring will outweigh interest rate headwinds for small cap stocks.
While we are expecting positive returns for the U.S. markets in 2025, we don’t expect continued performance at the same level as experienced in recent years. As we’ve discussed at length with clients, the S&P 500 Index tends to experience an average intra-year drawdown of ~12% on an annual basis. In 2024, the index’s max drawdown was only ~8%. As the new administration begins implementing their policies on day 1 (Monday January 20, 2025 at 12:00 PM EST), we’ll likely see some short-term volatility. Republicans still have unified control of all three branches of the government, and while the margins are thinner than what was expected on election day, unified government structures still pose a higher risk of downside volatility. On average, returns during a unified government, albeit positive, have been lower than the average during periods of a divided government. The lower market volatility experienced in 2024 combined with a new administration and stocks priced for perfection (from a valuation perspective) pose an opportunity for mean reversion and near-term corrections in the market. Although, underlying economic tailwinds such as AI, onshoring, and lower regulations should push markets higher through this volatility.
We are passionately devoted to our clients' families and portfolios. Contact us if you know somebody who would benefit from discovering the North Star difference, or if you just need a few minutes to talk. As a small business, our staff appreciates your continued trust and support.
Please continue to send in your questions and see if yours get featured in next month’s Timely Topics.
Cheers to all as we look forward to a healthy and prosperous 2025!
Best regards,
Mark Kangas, CFP®
CEO, Investment Advisor Representative