Markets may not be rallying to end the year, but economic momentum is strong heading into 2025.
So much good was achieved in 2024, including an economy with GDP growth of 3.1% in its most recent estimate and an unemployment rate of 4.2%. Likewise, corporate earnings growth was 9.5%, a stunning reversal from the meager 1% growth companies delivered in 2023. We had it all, it seemed, to end the year on a high note, including optimism over the tax and business-friendly policies of incoming President-elect Donald Trump. But it appears this year’s holiday trading may not deliver on the “Santa rally” to which we have become accustomed.
Why? “Ebeneezer” Powell, as some are now calling him, is the culprit. This week, the Federal Reserve Open Market Committee (FOMC), led by Chair Powell, decided to cut rates, but did so with such a hawkish outlook for the future that the negative reaction on Wall Street was swift and severe. Markets suffered their second-worst drop of the year following the announcement, though stocks remain not terribly off from all-time highs.
The Fed’s new range for its federal funds target rate is now 4.25%–4.50%. However, the FOMC signaled a significant reduction in its forecast for additional policy adjustments over the next 24 months as well as an uptick in expectations for inflation and growth. According to the dot plot of future expectations, most Fed officials see just two interest-rate cuts in 2025, another two rate cuts in 2026 and one more cut in 2027, resulting in a terminal rate of 3.00%, revised up from 2.875% by 2026 in the September forecast.
The Fed’s outlook also noted it believes inflation will remain stubbornly elevated at 2.5% in 2025, while unemployment will tick up slightly to 4.3% and GDP growth will clock in at 2.5%. The Fed maintained its positive characterization of the economy, noting an ongoing “solid pace,” with unemployment still “low,” but it described inflation as having only made some “progress” towards the central bank’s target, highlighting how prices remain “somewhat elevated.”
Notably, Cleveland Fed President Beth Hammack, who only joined the FOMC this year, dissented in favor of holding rates steady. It was the first dissent by a regional president since 2022 and is an indication of a more bifurcated committee as the bank makes less progress than hoped to cool inflation.
The case for a Santa rally was also hindered by the fact that we seem to be careening toward a government shutdown. Congress had been close on the passage of a bipartisan continuing resolution that extended government funding into next year and reauthorized an array of lapsed health, agriculture and other aid programs. But Trump’s team, led by Elon Musk, derailed the negotiations in the past 48 hours, announcing their opposition to the bill on social media and pushing GOP leaders to demand more concessions—including a temporary or permanent lifting of the debt ceiling. This has thrown Republican Congressional leadership into a tailspin, as today is the deadline to fund the government and avoid a shutdown over the weekend.
It is clear 2025 is going to be complicated, and stretched valuations are tempering our optimism for a year in which investors will need to wade through the complexity of a solid economy with shifting monetary and fiscal policy aspects. Santa may not come to investors this year, but not because we have been naughty. Rather, a Santa rally may not come because it already came early and often in 2024.
We have experienced the gift that keeps on giving with the continuation of the bull market that took off at the end of 2022. But do not despair, because there is nuance in the opportunity set offered by a market with such narrow leadership for far too long. Indeed, many companies without the artificial intelligence halo are not as expensive as the “Magnificent 7” stocks. This group has captured such focus that their shares are now worth more than the annual GDP of every country in the world except for the U.S. and China. However, it is also true these companies are growing earnings at an impressive clip, are not interest-rate sensitive and may even function as a safe haven in 2025 as market volatility advances in response to the Trump administration taking hold.
All in all, it is a good time for reflection and recalibration, and we are here to offer our advice in navigating what might be tricky terrain ahead, starting with a prudent rebalancing for most investors stretching over this tax year and into 2025.
This is not the time to lose faith. While the presidential, fiscal and monetary transitions ahead may seem daunting, it is important to remember these are shifts that the market has navigated before, and we believe they will do so again. It helps to have a strong economic and earnings base as the jumping off point, and we have those conditions today. As the legend goes, Santa comes to those who believe, and believing in the long-term growth of companies is how investors are rewarded for their good behavior year after year.
I want to wish everyone a happy holiday season and extend my thanks for your interest in our weekly investment commentary. If you would like to speak personally with a member of your advisory team, please call 833.RWA.PLAN (833.792.7526).