The Daily Forex Market Report
November 8, 2024The Daily Forex Market Report
November 12, 2024
NEWS
“2024 Market Momentum: Why US Equities Are Poised for Continued Success in 2025”
As 2024 draws to a close, and with most of the year’s economic event risks now in the rearview mirror, the time has come to reflect on what is shaping up to be a really strong year as far as investment returns go while digesting what has been an eventful recent period, and how this might impact the market going into 2025. It’s worth mentioning that at Foundation Fund Managers our focus is almost exclusively on the US market so this overview will cover US equities and how politics might impact their market.
Taking a quick look at the year gone by the overwhelming theme has been one of US exceptionalism which has been driven by a combination of robust economic growth, inflation heading back down towards target, a resilient labour market and US mega-cap tech stocks leading the artificial intelligence (AI) race. Without wanting to go into too much detail it is worth noting that the current bull run in the US turned two years old on the 12th of October 2024 thanks to these multitude of tailwinds, with the S&P500 index notching up 60% in gains over this period while over 2024 thus far the index is up by 26%. The performance of US equities has been exemplary but the good news for investors looking to enter the US market is that history suggests the chances of further gains are well within reason.
The strength of the US economy coupled with their market-leading position in the ongoing AI arms race was a major boon for stocks over most of 2024. Still, the build-up to, and subsequent results of their presidential election has also had a major impact on equity prices. It must be stressed that US indices were already at record highs going into the elections, and with the S&P500 having registered 57% in gains over the Biden administration’s reign thus far the bar has been set fairly high for the Trump administration to outperform its predecessor. But the “Trump Trade” has given fresh impetus to stocks as his policies around reducing corporate taxes, overseeing a deep round of deregulation while also opening the fiscal taps has seen the market pricing in further upside for stocks. Adding to the optimism is the increasing prospects of a “red sweep” where, at the time of writing, Republicans have already won the Senate while leading the race to win the House of Representatives. Since 1923 the stats show that when Republicans have full control of Congress the annual average return for the S&P500 is 14.52% over the four-year term.
Things are looking favourable for 2025 and beyond as far as political tailwinds go, excessive trade tariffs notwithstanding, but arguably of more importance is the Federal Reserve (FED) and their increasingly likely masterstroke of guiding the US economy to a soft landing. The FED have copped their fair share of criticism over recent years by first classifying runaway inflation as “transitory”, an error that saw them becoming one of the last major central banks to raise interest rates to try and cool inflation, and then waiting until they could see the whites of their 2% inflation target’s eyes before finally starting their rate cutting cycle in September. But a huge amount of credit should go to Chair Jerome Powell and his team as they have used elevated interest rates to bring inflation almost back down to their 2% target but without overly denting consumer demand which would have resulted in a damaging recession coupled with a worsening unemployment rate.
The FED stood their ground with rates in restrictive territory but they are now into their rate-cutting cycle with a 50bps reduction in September and another 25bps reduction on the 7th of November. The implication for the market is that a lower interest rate environment has historically been yet another tailwind for stocks, something that was highlighted in a recent note published by JP Morgan. Their research shows that the FED cut interest rates in September when the S&P500 was within 1% of its record high plus there were, and still are, no signs of a looming US recession. The market’s previous responses in this scenario are very encouraging:
- Since 1980, five of the ten best years for the S&P 500 happened when the FED cut rates without a looming recession (1985, 1989, 1995, 1998, 2019).
- The FED has cut rates 12 times in history when the S&P 500 was within 1% of its then-all-time high. The market was higher one year later all 12 times (with a median return of 15%).
In closing, US equities have had an exceptional run but we are two years into a bull run where the average lifespan of a bull run is just under six years which suggests we could see further upside from here. The building blocks of a pro-business administration in Washington, the FED cutting rates and the US economy firing on all cylinders at around 3% GDP growth give further confidence for stocks as we head towards 2025. The fact that market dynamics can change without notice must never be forgotten, and with two active wars now each into multi-year conflicts, we must be mindful of the potential for a risk-off flare-up at any moment, but on balance, the prospects for US stocks are looking positive should economic headlines remain constructive.
Hadyn Little
Market Analyst
Foundation Fund Managers
