Global Market Review and Outlook

Total Returns
Sources: Factset, William Blair Equity Research

The books are sealed for 2024, logging a second consecutive year of 20%-plus performance for the S&P 500 index. In the U.S., economically we are on firm footing with continued solid employment, substantially lower inflation (within range of the Fed’s 2% target), GDP growth above 3%, and corresponding corporate earnings growth for 2024 approaching 10% with similar expectations for 2025. The highly anticipated recession that economists were nearly sure would happen due to the steep and rapid increase in the federal funds rate (2022-2023) has been avoided and does not appear to be lurking. Now in an easing cycle, the Fed has lowered rates on three occasions since September. A pause in rate cuts is likely in the near term as the Fed balances the crosscurrents of the impact of higher interest rates with the prospect of sticky inflation.

Thankfully, a peaceful election took place in November, despite fears of chaos. Earlier this week, the country ushered President Donald Trump back into the White House. With a nearly 50/50 politically divided nation, some are ecstatic about the next four years, while others are terrified. While policy initiatives have quickly begun, and we expect the new administration to take a markedly different approach from President Biden, we know that there is no pattern to stock market performance under Democratic or Republican executive leadership. What has been most effective for investors in building wealth is staying invested and taking advantage of the long-term market trends.

The U.S. government and economy are large ships to steer, and change takes time. Markets move more quickly, often anticipating consequences—rightly or wrongly—ahead of clear results. Complacency is never a strategy, and in client portfolios we seek to take advantage of structural shifts in the global economy and market climate. In that regard, despite more attractive valuations, we continue to underweight international equity exposure, believing that the U.S. has entrenched advantages. In addition, we are incrementally more positive on smaller companies, which we believe will benefit as regulations lessen and short-term interest rates (and therefore variable borrowing rates) decline. While smaller companies have underperformed their larger counterparts in the most recent decade, the opposite has been the case over time as smaller, more nimble operators have had superior long-term returns.

President Trump’s stated priorities include an extension of the tax cuts that took place in 2017 (and were set to sunset at the end of 2025), stronger border protections and deportation of illegal immigrants, deregulation and trimming of government fat (DOGE), and the implementation of trade tariffs. While Trump has been floating the idea of “one big beautiful bill” to accomplish much of his agenda, it is too early to determine what will ultimately be implemented. With a narrow Republican majority in both the House and Senate, coupled with a hefty government deficit, compromises will likely need to be made.

It is worth keeping an eye on the ascent of the 10-year Treasury bond rate, which rose from about 3.6% at the end of the third quarter to 4.5% at the close of 2024 despite the Fed cutting short-term interest rates. As opposed to short-term interest rates, which are closely tied to the fed funds rate, longer-term interest rates reflect expectations of future growth, inflation, and risk. A shift upward in the 10-year Treasury could signal government deficit concerns, anticipated higher inflation, or stronger future GDP growth. Longer-term interest rates also play into the calculation of present corporate valuations, as they are used to discount future cash flows back to current dollars. With the market trading well above long-term price/earnings multiple averages at 22x forward earnings, we do not expect much in the way of future market returns from expanding valuations; rather, corporate earnings growth will need to pull the load. Fortunately, analysts expect market earnings to grow by over 10% in 2025. Even so, continued elevated bond yields could pressure earnings multiples and serve as a headwind for future market returns.

Digging a little deeper, from a valuation perspective, the largest companies in the S&P 500 have high expectations. The Magnificent 7—Apple, Microsoft, Amazon, Nvidia, Alphabet, Meta, and Tesla—have benefited from the tailwinds of AI and are high-quality cash-flow-generating businesses. Their appreciation has been staggering, and for a second year in a row the returns of this elite group dominated the market, rising by an average of 60% in 2024. This compares with a positive, but much diminished, 12% average increase last year for the remaining 493 companies in the S&P 500 index. It is our belief that the valuation of the largest stocks (the top 10 companies in the S&P 500 trade at an average P/E ratio of 30x earnings) reflect their superior position; the remaining securities in the index trade at just 18x earnings. With the top 10 companies in the S&P 500 accounting for 39% of the weight of the index, the highest concentration in history, any pressure on the elevated valuations of these companies could result in market volatility. Our preference has always been to balance risk by constructing more diversified portfolios that limit the weights of the largest companies and broaden portfolio exposure to various growth opportunities. While the past year has challenged that notion, longer time periods have born results.

This is an exciting year for William Blair as we celebrate the firm’s 90th anniversary. The company was founded in 1935 in the midst of the Great Depression and not far off the bottom of the historic market crash of 1929; we have been a private partnership since that time and keep a conservative balance sheet to be able to navigate all market environments. We are proud of our stability, our culture, and our consistent focus on our clients, and are especially grateful at this milestone for the trust you have placed in us. Thank you, and we wish you a healthy and productive year ahead.