Quarterly Market Update

Market summary: US economy helped push up stock prices and bond yields.

First Quarter 2025

Market summary: US economy helped push up stock prices and bond yields

The S&P 500 index posted modest gains during the fourth quarter of 2024, bringing its total return to 25% for the year. Other asset categories struggled in Q4, including non-US stocks and fixed income assets.

See our interactive chart presentation for an in-depth analysis.

Both the US and emerging markets (EMs) displayed relatively positive earnings growth during 2024. Year-over-year growth accelerated for the US and trended upward for EMs after a prolonged slump. Non-US developed markets saw a reversal, with earnings growth decelerating and ending the year in negative territory. Investors continue to anticipate a broad-based rebound for global earnings growth in 2025.

Large-cap stocks advance: Stock prices of the largest US companies by market capitalization—concentrated in the technology and communications sectors—finished Q4 and 2024 with another dominant performance relative to the rest of the market. Share prices of the largest 7 companies more than tripled since the beginning of 2023, with earnings growth becoming the bigger driver of gains in 2024.

With valuations near historically high levels, earnings growth may be the key determinant for stock performance in the year ahead.

Based on analyst expectations, the average forecast for the S&P 500 index is nearly 9%, a level that historically has preceded below-average actual returns. Our proprietary survey of third-party, sell-side analysts shows extreme enthusiasm for US stocks relative to non-US equities and other assets, based on positioning recommendations.

Upside surprises for asset prices often become more difficult amid elevated expectations.

US stock exposure at record highs: With US household wealth levels near all-time highs, stocks have never played a larger role in the portfolio holdings of American investors. Stocks account for a record share of household financial assets, and more than 30% of household wealth is owned by Americans above 70 years old.

The market cap of the US stock market is nearly double the size of the economy, suggesting that changes in asset prices may have a greater impact on cyclical economic trends than in the past.

Economy/macro: A strong business cycle continued

The US consumer is in solid shape, supported by positive real wage growth, a sound job market, and high levels of wealth. Cash holdings relative to liabilities are at historically high levels, underscoring the strength of household balance sheets and the ability to access credit if needed.

Higher-income earners enjoy the strongest balance sheets, and there has been deterioration among lower-income cohorts, but the overall consumption backdrop remains constructive for the US economy.

Many US labor-market indicators softened during 2024, but overall employment conditions remained tight. The unemployment rate stabilized in the second half to end the year near our estimate of normal unemployment, and job openings steadied at a level that still exceeded the total number of unemployed workers.

More women and immigrants in the workforce helped offset falling participation rates from older workers, but immigration flows trended lower in 2024 and potentially tighter policy may restrain labor supply in 2025.

US profits still look strong: Corporate earnings growth for 2024 ended the year at a 9% growth rate, with consensus expectation of 14% in 2025. Profit margins have ticked up this year and stabilized well above pre-pandemic levels, and they are expected to inflect higher across all sizes of companies in 2025.

The largest 7 companies have been the biggest contributors to earnings growth in recent years, and the market expects these companies to maintain elevated margins and strong relative earnings power in 2025.

Inflation threats remain: Both headline and core consumer price index (CPI) have declined significantly from 2022’s highs, but core CPI remained sticky, ending the year above 3%. The Fed’s preferred inflation metric, personal consumption expenditures (PCE) stalled well above its 2% target and our forecasts (for both CPI and PCE) continue to indicate a flattish trend for inflation over the next year.

Market expectations for CPI inflation climbed higher in the fourth quarter, moving closer to our forecast. We believe returning to the stable, low-core-inflation backdrop of the past 20 years will be challenging.

A hefty decline in goods inflation drove recent disinflationary trends, but that trend has moderated and possible tariffs present upside risk. Services and shelter inflation remain elevated, partly due to structural supply-related constraints in labor and housing.

Absent a more significant economic slowdown, persistent core inflationary pressures pose a risk to the outlook.

The Fed may be close to done: The US Federal Reserve cut rates by 25 basis points (bps) twice during Q4, easing a total of 100 bps during 2024. A basis point is 1/100 of 1 percentage point. Coming into the year, the market expected 150 bps of easing, but stubborn inflation kept the Fed from easing more aggressively and as of the end of the year, the market expected only 1 or 2 more cuts in 2025.

Historically, stocks and bonds rally after the Fed’s last hike and before the first cut, which occurred this cycle through Q3 2024. Typical equity returns after the first cut are more mixed, which has been the case so far with roughly flat returns this cycle.

Global cycle less synchronized: Many major economies displayed signs of late-cycle expansion, experiencing stable services activity and employment but softening manufacturing. Weak domestic demand and structural headwinds raised recession risks in the eurozone, while China continued to struggle to emerge from its growth slump.

Canada is now on the cusp of early cycle, having benefited from lower rates and an improvement in economic activity. The global cycle faces policy crosswinds in 2025, including a potential headwind from trade policy and a tailwind from monetary easing. Most major developed market (DM) central banks continued to cut their policy rates during Q4, with expectations for more cuts in Europe and Canada in 2025 than in the US. China’s cyclical trends are mixed with some hints of improvement against a backdrop of structural challenges.

Recent policy signaling indicates an incremental focus on household consumption and social welfare, but structural imbalances within the Chinese economy—including excess capacity and a debt overhang in the real estate sector—remain headwinds for the housing market and consumer confidence.

The prospect of higher US tariff rates poses a risk for major exporters, particularly countries that have meaningful goods trade surpluses with the US.

Asset markets: Most asset classes finish with a positive 2024 return

The US equity market exhibited a wide dispersion of returns. Other asset categories struggled in Q4, including non-US stocks, which fell amid a rising dollar, and fixed income assets, which were hurt by rising Treasury yields.

Despite the weak quarter, most assets exhibited positive calendar year returns.

Equities: Growth stocks returned 6.8% in Q4, leading all other style categories for the quarter and the full year.

All other equity styles other than value stocks (−1.9%) generated a positive return for the fourth quarter. By S&P 500 index sector, consumer discretionary (+14.3%) and communication services (+8.9%) led the way in Q4, whereas materials (−12.4%), health care (−10.3%), and real estate (−7.9%) lagged the large-cap index return of 2.4%. Many non-US equity markets posted negative returns for the quarter, including Latin America (−15.8%), Europe (−9.7%), emerging markets (−8.0%), and Japan (−3.6%).

Valuations for the US continued to rise with the trailing one-year price-to-earnings (PE) ratio remaining well above its long-term average. Emerging-market valuations declined slightly in Q4 but remained above its long-term average, while non-US developed-market valuations remained the only region to finish below their historical average.

Cyclically adjusted price-to-earnings ratios for non-US stock markets appear relatively attractive as well, particularly when compared with current US valuations, which are well above our secular forecasts.

The expected earnings recovery in the next 12 months implies the forward P/E ratios for DMs and EMs are substantially lower than those in the US.

Fixed income: Despite rising Treasury yields, most fixed income asset classes provided positive returns for 2024 as credit spreads tightened and higher coupons provided positive income.

Most fixed income categories ended the year with yields near their long-term historical averages and credit spreads toward the lowest end of their historical ranges. Overall, fixed income yields suggest valuations that are roughly in line with long-term averages and better than the past decade.

Riskier asset classes, such as leveraged loans (+2.3%) and high yield (+0.2%) managed small gains for the quarter, ending the year in strongly positive territory, whereas more conservative fixed income segments, including long government & credit (−7.4%) and US Treasurys (−3.1%) declined for the quarter.

Currencies: The dollar appreciated during Q4, climbing steadily after the US election results. The pattern closely resembles the path of the dollar after the 2016 election when markets expected America-first economic and trade policies to benefit US growth relative to other countries.

However, the gains to USD in 2016 proved temporary as other factors countered the dollar’s rise and FX markets face a variety of crosswinds in 2025, including high US dollar valuations, large US rate differentials, and trade-policy uncertainty.

Outlook: Fidelity’s Active Asset Allocation Board, composed of portfolio managers across a variety of asset allocation strategies, meets quarterly to discuss macro views and asset allocation positioning. Members were generally constructive on the macroeconomic outlook and highlighted several investment opportunities. They generally held smaller active allocation positions compared with earlier in the cycle.

• Portfolio managers are generally overweight in risk assets.
• Some members discussed positively the potential for a broadening in stock market performance, including US small caps and non-US equities.
• High valuations in US equities and credit warrant smaller active positions.