• No end-of year rally but 2024 was a good year for US equities
• Rising bond yields hinder US equities but we remain positive
• Trends in emerging markets give us no reason to hold an overweight

Markets concluded the year on a cautious note, with investors tempering their expectations for the Federal Reserve’s pace of rate cuts following a hawkish December policy meeting. In December, the MSCI All Country World Index and the S&P 500 fell by 1.6% and 2.4%, respectively. Fixed-income markets also ended a turbulent year on a weaker footing. The yield on the 10-year US Treasury rose from 4.19% at the start of December to 4.57% by year-end, reflecting the resilience of the US economy and growing confidence that the Federal Reserve will ease monetary policy at a slower pace in 2025. The Federal Reserve now projects just 50 basis points (bps) of cuts in 2025, according to its median forecast. At the final policy meeting of the year, Fed Chair Jerome Powell emphasized that rates remain “significantly less restrictive” than at their peak and signaled that future rate reductions would be approached with “more caution.” In contrast, sharper rate cuts appear likely in the Eurozone, where weak economic growth supports our base case of at least 100 bps of reductions by the European Central Bank.

 

Despite December's pullback, global equities posted a robust 20.7% return for 2024. The S&P 500 led the gains with a 25% annual return, marking its second consecutive year of returns exceeding 20%. Several factors, including progress toward central bank inflation targets, monetary easing, robust US economic performance, and optimism about the commercialization of artificial intelligence (AI), buoyed markets. Other major equity markets also posted positive returns, albeit with varied performance. Improved economic sentiment in China and Japan drove annual returns of 19.8% and 21.2% for their respective MSCI indexes, though both markets experienced significant volatility. European markets underperformed relative to the US and Asia, with the MSCI EMU returning 10.1%, hindered by sluggish economic growth, increasing global competition for automakers, and political uncertainty in Germany and France. Defensive Swiss equities gained 6.6% while UK equities rose by 9.5%.

Commodity markets were held back amid subdued demand in China, with the broad commodity index returning 5.4%. Gold, however, surged 27%, supported by concerns over US fiscal policy, strong central bank purchases, renewed retail investor interest, and heightened geopolitical risks.

In fixed income, the Bloomberg US Treasury Index fell by 1.5% in December as the Federal Reserve indicated a slower pace of monetary easing for 2025. For the year, the index eked out a modest 0.6% return. European government bonds outperformed US Treasuries, with the Bloomberg Pan-European Aggregate Index returning 2.7%, as weaker economic conditions bolstered confidence in falling interest rates. High-yield credit delivered the highest returns within fixed income, with US and Euro high-yield bonds gaining 8.2% and 8.6%, respectively. Investment-grade bonds also posted positive returns, with the Bloomberg US Credit Index rising 2% and its Euro counterpart returning 4.7%.

Economic growth has remained resilient, driven by healthy domestic demand in several economies. Central banks are expected to continue cutting rates, fostering a favorable environment for equities and bonds. We anticipate high-single-digit earnings growth this year and next for the S&P 500. In fixed income, EUR-denominated investment-grade bonds remain appealing due to strong corporate fundamentals and tight spreads, which also enhance their value for portfolio risk management. Government bonds offer an attractive risk-return profile, especially if economic growth underperforms expectations. Accelerated rate cuts by the ECB are likely to steepen the yield curve.

Heading into 2025, we maintain a procyclical stance and an “overweight” position in equities relative to bonds. While our economic outlook remains steady, the incoming Trump administration introduces an element of uncertainty. We prefer US equities for their earnings growth potential and anticipate catch-up opportunities in Europe, where slower growth and disinflation pave the way for further rate cuts. We expect positive spillover effects from a robust US economy, a strong dollar, and potentially looser German fiscal policies to outweigh risks associated with new trade tariffs.

Please find attached our last Asset Allocation Update for January.