by Michael Antonelli, Market Strategist, Baird
2024 has been, by all measures, a spectacular year for the stock market. Hot on the heels of a strong 2023 (+26%), 2024 will likely return another 20%+ return. Back-to-back 20% years are rare (it’s only happened 8 times since the end of WW2) so you might wonder if that’s bearish for the following year. Well, according to history, it’s not. Of the 8 times we saw back-to-back 20% gains in the stock market, the very next year was positive 6 times. A 75% win rate with an average return of 12.5%. Now we know past performance is no guarantee of future results, but when the stock market is doing well, it tends to continue to do well. Which raises the question, “Why is the stock market doing so well?” So let’s dig into that.
The main driver of US stocks over the long run is and always will be corporate earnings. How much money are companies making and what are investors willing to pay for those profits? From 2020 to 2024, the US stock market is up roughly 99% and earnings account for 60% of that (dividends account for 15% and multiple growth for 24%). The primary reason stocks continue to do so well is that forward measures of earnings have been growing for years now. In January 2023 we (consensus) thought the S&P 500 would do $225 per share in earnings in the following 12 months. In January 2024 we thought it would be $243. Now, at the end of 2024, we think it will be $270. It’s just that simple.
Why are earnings growing? Because our economy is benefiting from numerous tailwinds: strong consumer spending bolstered by rock solid balance sheets, a housing market that remains stable even as demand wanes, government spending, a massive generation in its prime (Millennials), and technological themes such as AI and GLP drugs (weight loss).
You might have heard that “it’s only a few stocks driving the market higher” but that’s not true. Equal Weight S&P 500 is at a new all-time high (as are numerous equal weight sector measures) and so are the small-cap and mid-cap indices. It’s not just a few tech names, period.
As a result of multiple years of gains, the stock market has become somewhat expensive (even with earnings growth), so that’s something we will continue to monitor. Valuation is historically a terrible timing tool so there’s not much we can do with this information other than to acknowledge it. If you always sold the stock market when it was expensive, your long-term returns would be horrific.
We will have a new administration in the White House in 2025 and all eyes are on the potential impact of tariffs, immigration reform, and tax code changes. It’s too early to draw any conclusions because we don’t know what can actually happen versus what’s being floated. President-elect Trump does tend to measure his success via the stock market so we will be watching its reaction to his various proposals in real time (we saw it had ZERO reaction to the latest tariff talk in November).
What could derail the market? Unfortunately, there’s no great answer to that because risk, TRUE RISK, is something none of us can see. Think about the three biggest risks of the past 24 years: COVID, the Financial Crisis, and 9/11. No one saw any of those coming. Which is why building durable portfolios to survive the shocks is the key to long-term success.
The United States continues to be the premier destination for investors, our dollar remains the world’s reserve currency, and the economy is as vibrant and electric as ever. While we will have our ups and downs, and the stock market will occasionally have bouts of volatility (including bear markets), there is still no better place to grow wealth than in the greatest nation the world has ever seen.
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