Q4 2024 Quarterly Market Outlook: Once More Unto the Breach

By Liz Levy, CFA, Managing Director of Investment Research 

I am writing this note in early January from a cozy cabin in the North Country of New Hampshire, sitting in front of a blazing fire while my dog snoozes at my feet. But just outside of this picture of hygge contentment, the winds are howling and the snow is flying. It seems like a perfect metaphor for thinking about the markets right now.

2024 was another banner year for investors, with the S&P 500 finishing the year up more than 23% and the small-cap Russell 2000 up 11.5%—but conditions lurking just outside the door may be threats.

In this note, I’ll review the past quarter for the markets, prognosticate what might come next for them, and indulge in some philosophy about what’s next for all of us who care about the type of work that Clean Yield does.   

From a high level, 2024 was similar to 2023 for the equities market—another year of 20%+ returns. And like the prior year, it was a small group of large-cap growth technology stocks that led the market. In 2024, the equal-weighted S&P 500 index was up only 11% for the year, as the “Magnificent Seven” stocks drove the market-cap-weighted index up 23%. For the year, for example, Nvidia was up more than 170%, while Tesla logged more than 60% (most of that was in the 4^th quarter—more on that below). For the full year, the contribution of Technology stocks, such as semiconductors and cyber technology, drove the bulk of the return, with help from Financials such as large banks, credit cards, and payment processors. On the lower end of the returns spectrum this year, fossil fuel and renewable Energy, Health Care, and Materials lagged the other groups.   

Market Driver(s) 

In describing the equity markets in the fourth quarter, I could write about how data early in the quarter pointed to continued economic strength, with the labor market and jobs particularly holding up well. But, as we all know, that’s not what really mattered this quarter. Donald Trump was successful in his bid to retake the White House, and investors immediately rejoiced. The S&P 500 benchmark of large-company stocks shot up 5% in the few days after the election, and the Russell 2000 benchmark of small companies, which are seen as more exposed to the domestic economy than their larger peers, rose nearly 6% the day after the election. The real winners of the post-election bacchanal were Tesla’s stock, up 38% during the month of November, and cryptocurrency, with Bitcoin futures up 39%; both were nice returns on investment for Elon Musk and other Silicon Valley-based campaign donors. And in another clear sign of the extent to which policy expectations drove stock returns this quarter, renewable energy stock valuations tumbled on expectations of a far less friendly political climate domestically (an overreaction, we believe). After the party comes the hangover, however, or at least a case of mild regret in this instance. Both large- and small-cap stock indices pulled back significantly from their post-election highs in December, with the 500 ending the quarter up about 2% and the 2000 about flat.  

Total returns for most fixed-income portfolios were negative, as bond prices fell and both two- and 10-year Treasury rates rose sharply despite a Fed interest rate cut at the end of the quarter. The market is pricing in fewer rate cuts in 2025 than were expected a few months ago. While the bulk of economists are still predicting one or two quarter-percent cuts by the end of September, a growing number are predicting no cuts, and some strategists are whispering about rate increases, for reasons described below. The dollar was also particularly strong in the quarter, up 7.6%, which hurt foreign stocks relative to U.S. stocks.   

Looking Under the Hood

The reason for the euphoria and retreat is related to where we may be headed under Trump 2.0. A Republican president, aided by a Republican Congress, brings the potential of tax cuts and deregulation, giving investors reasons to dream of increased profits—and these dreams take the form of higher stock prices. In addition to Trump’s financial backers, some of the companies that benefited the most post-election were financial services companies that would most benefit from increased mergers and acquisition activity, for example.  

Deregulation and tax cuts are not the only things Trump ran on, of course. And two aspects of his platform in particular should give—and eventually seem to have given—the markets pause.

First, he has promised a brutal, massive deportation of immigrants. If carried out, it’s not hard to imagine the economic impacts of a dramatic reduction of the labor force—small businesses like restaurants and shops shuttered or operating far below capacity for lack of workers, for example. And in fact, a December study from the Brookings Institute estimated that Trump’s immigration policies could reduce GDP by up to 0.4%. In addition, this lack of workers then heightens pressure to increase wages to compete for workers—potentially a lever for the return of increased inflation. Second, Trump has threatened to levy tariffs on virtually all goods imported from anywhere. While Trump insists that the tariffs will benefit the U.S., increased prices due to tariffs are in fact passed on to consumers. Retailers ranging from AutoZone to Columbia Sports and Stanley Black & Decker have already confirmed intentions to pass tariffs on to consumers in the form of price increases—again, potentially increasing inflation.  

While it seems the Fed in 2024 pulled off the rare “soft landing” by taming inflation without triggering a recession, it would be unlikely to do so again in 2025, particularly if the inflation was directly triggered by the federal government’s actions. Add to that the already-stretched equity market valuations and the concerns about the impact on the national deficit of the promised corporate tax cuts—well, it’s easy to see why stocks retreated some at the end of the year.  

This is not to prophesize doom, gloom, and recession. Trump is, after all, a “businessman,” and shoving the national economy into recession is not what he wants to do in his first hundred days. So cooler heads may prevail, and the tariff and deportation actions may turn out to be more modest than the campaign rhetoric. Or the spending-slashing Department of Governmental Efficiency could come up with its own way to plunge the country into chaos—if we learned anything in the first Trump administration, it was to never take anything the administration says at its word.  

So how, then, to position investment portfolios?

We believe that we are on the right path—investing in companies for the long term and paying attention to business models, competitive moats, balance sheet strength, quality, and treatment of workers and the environment.

We will continue to take advantage of opportunities that a volatile market may bring us to continue to diversify our portfolios—in some cases rotating from positions that have benefited from recent price moves into new positions in attractively valued stocks that we are excited about for the long term. 

Where to Next?

Despite the macro context of the world around us, our commitment to values-based investing remains, with our pledge to maximize the positive impact our clients’ financial assets can make in the world through proxy voting, shareholder advocacy, and impact investing. How we do this work, however, may change. While engaging in dialogue with the companies we invest in will remain an important tool we use, we expect Trump appointees to change the rules of the game in favor of corporations, particularly with regard to filing shareholder resolutions. His nominee for the chair of the Securities and Exchange Commission (SEC), for example, is already a vocal critic of the hard-fought SEC rule requiring companies to disclose more information about climate change, calling climate effects “very hypothetical.” With control of the SEC, the Republican commissioners will be able to make filing shareholder proposals much harder through a variety of tweaks they will be able to enforce without needing a rule change.   

We struggle to understand a world view in which equity investors, who are the actual owners of publicly traded companies, have even less of a way to communicate preferences to the management teams of their companies. But that doesn’t mean we will stop advocating on behalf of our clients; we have filed three resolutions for this spring’s annual meeting season, on topics including reproductive health benefits and diversity, equity, and inclusion disclosure.

While we may not be successful in all three engagements, we believe the issues we are pressing for will improve conditions for employees of our companies—and therefore the companies’ competitiveness as employers and, eventually, their bottom lines.

The importance of these issues and others does not go away, no matter how much a new administration may wish them to. Pretending the climate isn’t changing will not make storm severity decrease, and not having adequate risk modelling will not help when the storms hit.   

At this moment, not knowing what the next few months and years will bring, we are doubling down on our commitment to our clients and reaching out to our communities even more. We will use the tools at our disposal for shareholder advocacy and impact investing as best we can for as long as we can, in pursuit of creating a positive impact on the world. Onward…