Mark on the Markets
February 2025

A New Year
A New Administration
& New Opportunities

One year ago, we commented, “Rate cuts that occur because the Fed ‘can,’ not because they ‘must,’ is the preferred path” for investors.

It’s not that we have special insights when peering into the future. We have yet to find anyone who can consistently and accurately forecast peaks and valleys in the stock market.

But we recognize that Federal Reserve rate cuts in response to weak economic growth (the “must” cut scenario) have historically failed to spur market gains.

For example, rate cuts by the Fed that were tied to recessions in 1974, 1990, 2001, and 2008 failed to prevent a slide in stocks until investors anticipated an economic upturn.

Last year, Fed officials indicated the possibility of rate cuts throughout the year, not due to fears of a damaging recession, but because they correctly anticipated a slowdown in the rate of inflation (the “can” cut scenario).

Prices are still elevated, and inflation continues to exceed the Federal Reserve’s annual target of 2%. However, the inflation rate did ease during the year, which encouraged the Fed to act in September. This led to three consecutive reductions in interest rates.

By the end of the year, the Fed had lowered the fed funds rate by a full percentage point to 4.25 – 4.50%.

The economy continues to expand, and with it, most major corporations are generating significant profits, according to LSEG.

Simply put, an easier monetary policy combined with economic growth and rising corporate profits fueled the second consecutive annual gain of over 20% in the S&P 500. This is the first back-to-back increase since the late 1990s, according to The Wall Street Journal.

Other catalysts added to the advance, but the economic fundamentals played a significant role in last year’s returns.

Nonetheless, we believe it’s important to highlight the difference in performance between the Dow Jones Industrial Average and the S&P 500 Index in 2024. This discrepancy can be attributed in part to the differing methodologies used to calculate these indexes.

Additionally, the surge in mega-cap technology stocks significantly contributed to the growth of the S&P 500 Index this year.

According to Barron’s and Dow Jones Market Data, seven large tech firms made up over half the gains in the S&P 500 Index. Over concentration in a few positions? Yes! And we’ll talk more about that later in this newsletter.

Two Steps Forward, One Step Back, Two Steps Forward

Although volatility can be unsettling, it is often temporary. Last year’s maximum peak-to-trough pullback for the S&P 500 Index amounted to just under 9%, according to S&P data from the St. Louis Federal Reserve. Volatility was tied to a shift in monetary policy by the Bank of Japan.

Nonetheless, investors quickly shifted their focus back to U.S. economic fundamentals, and stocks notched new highs.

A New Year

We’ve marched one month into 2025, and many of the major themes that drove the market higher last year remain in place. The economy is expanding, and corporate profits are expected to remain on an upward trajectory. Although the Fed is eyeing fewer rate cuts this year, it isn’t currently considering rate hikes.

Furthermore, the incoming Trump Administration is expected to promote business-friendly policies such as deregulation, which will likely benefit both the economy and corporate profits. We may see a reduction in the corporate tax rate, while additional corporate stock buybacks are expected to underpin stocks.

Nonetheless, no one can accurately foretell the future. That’s a given.

What are some potential pitfalls that might stymie investors in 2025?

For starters, a rebound in inflation could force the Fed to raise interest rates. Such a move would likely generate uncertainty for a market that is richly valued and priced for perfection. On the other hand, if the Fed is too cautious and misjudges the economy, a deteriorating economic outlook could quickly hamper corporate profits.

Meanwhile, pro-business policies that are expected to be ushered in by the new president bolstered optimism following the election. However, headwinds may be forming.

On Inauguration Day, January 20, President Trump unveiled his America First Trade Policy, declaring his intent to impose 25% tariffs on Canada and Mexico starting February 1. He justified the move by citing the influx of migrants and fentanyl from both nations. However, Trump did not specify the mechanism he would use to implement the tariffs so swiftly. One possible option could be invoking the 1977 International Emergency Economic Powers Act, which grants the President broad authority during emergencies.

If President Trump enacts sweeping tariffs, we may see a bump in inflation that is accompanied by slower economic growth. In 2018, Trump was selective as he enacted tariffs, which generated market volatility and uncertainty.

Despite multiple Fed rate cuts last year, longer-term Treasury bond yields turned significantly higher over the last three months amid slower progress on inflation, upbeat economic growth, and a stubbornly high federal deficit.

A continued increase in yields could pose a greater challenge for stocks.

Final Thoughts

A diversified portfolio cannot completely shelter you from market pullbacks, but it can help lower volatility and has historically been the most effective path to achieve one’s financial goals.

Our approach is guided not only by our experience but also by the weight of academic research. We recognize that stocks are not immune to periods of subpar returns, but patient and disciplined investors have historically been rewarded.

A Concentrated Market 

The S&P 500 is increasingly dominated by seven large technology companies, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla. These companies are known as the "Magnificent 7," which now account for roughly 30% of the index’s total market capitalization—an unprecedented concentration. Fueled by historically low interest rates over the past 15 years and the recent surge of interest in artificial intelligence (AI), these stocks have experienced rapid gains. In 2023 alone, they contributed nearly two-thirds of the U.S. equity index’s returns.

While these companies could continue to rise, their dominance in market-cap-weighted indices introduces significant risks. A downturn in just one of these stocks could have an outsized impact on investors, even those with diversified portfolios.

Perspective

The Magnificent 7 heavily influence both U.S. and global equity indices, particularly those weighted by market capitalization, where larger stocks exert more influence over performance. In contrast, equal-weighted indices distribute capital more evenly among all stocks. For example, while the MSCI All-Country World Index includes nearly 3,000 stocks across developed and emerging economies, the 10 largest U.S. stocks—including the Magnificent 7—comprise 20% of its value.

To put this in perspective, the market capitalization of the 10 largest U.S. stocks now equals the combined value of all publicly listed companies in the UK, France, Germany, and Japan—whereas a decade ago, it was less than half of that.

Why Index Concentration Poses Risks

As an index becomes more concentrated in a few stocks, it loses its effectiveness as a diversification tool. Investors in these indices may experience greater-than-expected volatility for several reasons:

• Correlation: These seven stocks all belong to the same sector, with overlapping business models. Their recent gains have been largely fueled by enthusiasm for AI. If investor sentiment shifts, or if one stock declines, it could trigger a broader sell-off, weighing down the overall index.
  
  
• Rate sensitivity: These high-growth stocks are particularly affected by rising interest rates, as their valuations depend on future earnings potential. Higher rates raise the cost of capital, making it harder to justify their lofty valuations. Additionally, their strong correlation with bonds—which also tend to decline when rates rise—could weaken traditional stock-bond diversification strategies, such as the 60/40 portfolio.
  
  
• Valuations: The Magnificent 7 trade at an average forward price-to-earnings (P/E) ratio of 28, significantly higher than the S&P 500’s broader multiple of around 20. Other valuation metrics also suggest these stocks are historically expensive, potentially limiting future gains.

Historically, index concentration tends to move in cycles, rising during periods of extended rallies driven by specific themes or sectors until an economic shift—such as a recession or changes in interest rates—triggers a market reset. Current conditions suggest the potential for a reversal, which could disappoint investors relying on the cap-weighted S&P 500.

Research indicates that stocks generate stronger returns when index concentration is lower, while higher concentration tends to precede weaker performance. If economic conditions or company fundamentals fall short of expectations, both the Magnificent 7 and the broader index could be vulnerable.

Ok, What Should I Do?

Do what we do! The important thing is to recognize what we can control, and what we cannot. We can’t and you can’t control shorter-term returns. That’s out of our sphere of influence. But there are aspects of investing that we can control.

1. Diversification: It’s the best approach to your financial plan. A mix of stocks, bonds, and cash (and any other diversified asset class) plays a role. Much will depend on your appetite to take on risk. We encourage everyone to complete our risk questionnaire and understand how you view markets, and the resources entrusted to you.
   
   
2. Time: Long-term performance is about time in the market and selecting securities that show both fundamental and technical opportunities. We do not try timing the market or picking the hottest stock tip. We look for good opportunities that offer long-term rewards. We don’t always get it perfectly but strive to hit our targets by keeping what is working and discarding what’s not.
   
   
3. Behavior: Your behavior plays an important role in long-term returns. Do you react when stocks soar or falter? Does euphoria lead you to become too aggressive? Does market weakness push you to get too conservative after equities have already faltered? It’s all about responding with emotional intelligence and not reacting out of impulse.
   
   
4. Biblically Responsible Investing:  Avoiding investments in companies with questionable ethical practices or those involved in controversial industries reduces exposure to reputational, regulatory, and litigation risks. This approach may lead to more stable and resilient investment portfolios, as companies adhering to ethical standards are less likely to face public backlash or legal challenges that could adversely affect their financial performance.

It’s why we consistently emphasize your investment strategy and your long-term goals in your financial plan. Your investment strategy isn’t etched in stone. Your financial plan isn’t etched in stone. They’re flexible.

When life brings about changes, we guide you to make adjustments. But we encourage adjustments in the variables you can control.

Mark on the Charts

A pullback in the S&P 500 continues to move up along the trend line (blue dotted line). So, we can ask, is this market going higher? Well, as a market technician, I follow that which matters most – price! And the longer-term trend shows we remain in a secular bull market. However, as articulated in this newsletter, there is still reason to tread carefully. Overconcentration in just a handful of companies is something to monitor.

The Value Line Geometric Index is a broad index of around 1,700 stocks, where each stock is given an equal weight of the index. This contrasts with the S&P 500, which is dominated by the seven largest technology companies. While this index has been choppy over the past several years, the general trend is now churning upward. We see this as a positive sign for the broader market.

Timely Tax Tidbits

Are you familiar with how our federal tax code originated?

In 1909, progressives in Congress attached a provision for an income tax to a tariff bill. Conservatives, hoping to thwart the idea, proposed passing the bill as they believed 75% of the states would not ratify the constitutional amendment, according to the National Archives.

Today’s Complex Tax Puzzle

Things have changed since. They continue to change. Filing taxes can feel like a puzzle, leaving many taxpayers unsure if they’re getting every dollar they deserve. Don’t let the fear of missed tax credits or deductions cost you money. You’ve earned it – claim it! It’s your money

Late last year, the Internal Revenue Service provided detailed information on adjustments to more than 60 tax provisions that will impact taxpayers when they file their returns in 2026 for tax year 2025.

As incorporated into law, the IRS adjusts various categories to account for inflation. Annual inflation adjustments, however, do not cover all tax provisions.

Below, we will touch on the high points. If you have questions, please reach out to us. As always, if you have specific tax questions, feel free to consult with your tax advisor.

1. Tax brackets have changed. Table 1 highlights the seven tax brackets for 2025 for single, married, head-of-household, and married filing separately.

Sources: Tax Foundation, IRS

The rates in Table 1 are applied to taxable income—income less the standard deduction or itemized deductions, whichever is higher. In other words, if you are married and filing jointly and taxable income is $50,000, the first $23,850 is taxed at 10%, and the remaining income is taxed at 12%. This does not include tax credits or self-employment tax.

Source: IRS

The standard rules apply to these four tax brackets. For example, if a trust has $10,000 in income during 2025, taxes would be calculated as follows:

• 10% of $3,150 (earnings between $0 – $3,100) = $315
• 24% of $6,850 (earnings between $3,101 – $10,000) = $1,644
• Add the two together, and total federal taxes due = $1,959

2. For single taxpayers and married individuals filing separately for the tax year 2025, the standard deduction rises to $15,000 for 2025, an increase of $400 from 2024, according to the IRS.

For married couples filing jointly, the standard deduction rises to $30,000, up $800 from tax year 2024. For heads of households, the standard deduction will be $22,500 for tax year 2025, an increase of $600 from the amount for 2024.

For single filers and heads of households age 65 and over, the additional standard deduction will rise from $1,950 in 2024 to $2,000 in 2025.

For 2025, married couples over 65 filing jointly, the additional deduction per qualifying spouse will increase from $1,550 in 2024 to $1,600 in 2025, a $50 increase per qualifying spouse. If both are older than 65, there is a total increase in their standard deduction of $100.

3. For tax year 2025, alternative minimum tax exemption amounts for unmarried individuals is $88,100 ($68,650 for married individuals filing separately) and begins to phase out at $626,350.

For married couples filing jointly, the exemption amount is $137,000 and begins to phase out at $1,252,700.

4. The maximum child tax credit is $2,000 per qualifying child. It is not adjusted for inflation. The refundable portion of the child tax credit is adjusted for inflation and will remain at $1,700 for 2025.

5. The gift and estate exemption for individuals in 2025 is $14.0 million, up from $13.6 million in 2024. The annual gift tax exclusion for 2025 is $19,000, up $1,000 in 2024, without using any of the lifetime gift and estate tax exemption.

6. Favorable treatment for long-term capital gains is a cherished tax break for investors. Long-term capital gains, such as the profit on the sale of a stock held for more than one year, are taxed at a more favorable rate than short-term gains. A short-term gain is taxed as if it were ordinary income. Qualified dividends are also taxed at a lower rate.

Source: IRS

7. The Tax Cuts and Jobs Act (TCJA) of 2017 includes a 20% deduction for pass-through businesses. Limits on the deduction begin phasing in for taxpayers with income above $197,300 (or $394,600 for joint filers) in 2025. This compares to income above $191,950 and $383,900, respectively, for 2024 joint filers.

8. Other taxes you may be subject to or credits you may capture.

• High-income taxpayers are subject to the net investment income tax of 3.8%, levied on the lesser of net investment income or the excess of modified adjusted gross income (MAGI) over the following threshold amounts: $200,000 for single and head of household filers, $250,000 for married filing jointly or qualifying surviving spouse, and $125,000 for married filing separately.

These amounts have never been indexed to inflation.

In general, net investment income includes but is not limited to interest, dividends, capital gains, rental and royalty income, and non-qualified annuities, according to the IRS.

Net investment income generally does not include wages, unemployment compensation, Social Security Benefits, alimony, and most self-employment income.

Tax on a child’s investment and other unearned income, also known as the kiddie tax, applies to unearned income for children under the age of 19 and college students under the age of 24. Unearned income is income from sources other than wages and salary, like dividends and interest.

The exemption from the kiddie tax for 2025 rises by $100 to $2,700, according to the IRS. A parent will be able to elect to include a child’s income on the parent’s return for 2025 if the child’s income is more than $1,350 and less than $13,500, which compares to $1,300 and $13,000, respectively, in 2024.

• For tax year 2025, the maximum credit allowed for an adoption of a child with special needs is the amount of qualified adoption expenses up to $17,280, increased from $16,810 for 2024.

The available adoption credit begins to phase out for taxpayers with a modified adjusted gross income above $259,190. It is completely phased out for taxpayers with a MAGI of $299,190 or more.

The credit is non-refundable, so the amount cannot exceed your tax liability. However, you may apply any excess credit amount to future years, up to five years.

IRA Contributions

The IRA contribution limit for 2024 and 2025 is $7,000 for those under age 50, and $8,000 for those age 50 or older.

This is up from 2023’s limits of $6,500 for those under 50, and $7,500 for those age 50 or older. You can make 2025 IRA contributions until your April 15 federal tax deadline for income earned in 2025.

SEP-IRA Limits

The SEP-IRA contribution limit for 2025 is 25% of an employee’s total compensation, up to $70,000, and up $1,000 from 2024. Contributions may only be made by employers.

If you are self-employed, you may make an employer contribution on your own behalf. If you’re self-employed, your contributions are generally limited to 20% of your net income.

401(k) & 403(b) Contributions

The 401(k) & 403(b) contribution limit for 2025 is $23,500 for those under age 50, while the catch-up contribution limit remains at $7,500 for those age 50 or older.

Changes May Be on the Horizon

The TCJA significantly increased the standard deduction, simplifying the filing process, as it eliminated the need for many taxpayers to itemize. But it also scrapped the personal exemption.

Unless extended, please be aware that many provisions of the TCJA will expire at the end of 2025. Republicans generally favor a broad extension of the TCJA. However, it is uncertain how negotiations will eventually play out regarding key provisions. Any changes will be implemented for tax year 2026.

Expected changes if the TCJA is allowed to sunset:

• When the TCJA expires at the end of 2025, marginal tax rates for individuals will revert to pre-TCJA levels, including a maximum rate of 39.6%, up from 37%.
  
  
• The standard deduction will return to pre-TCJA levels, with an adjustment for inflation. For single filers, the standard deduction would fall to approximately $8,300 and $16,600 for joint filers.
  
  
• The child tax credit will be reduced to $1,000 from $2,000.

The personal exemption will be reinstated and valued at about $5,300, per the Tax Foundation.

• The gift and estate tax exemption will be reduced for individuals to roughly $7.5 million, according to Fidelity.
  
  
• The $10,000 cap on itemized state and local taxes (SALT) will be removed.
  
  
• The special 20% tax deduction for pass-through businesses will disappear.

We are mindful that the tax code is quite complex. Thoughtful tax planning around your investment management can help you keep more of what you earn. When taxes begin to take a large portion of your annual income, it’s essential to take a proactive approach to minimize your tax burden.

Talk with us to review your tax returns and look at ways to strategically minimize taxes over your lifetime. Keeping more means you have more to leave for the people and missions you love. It is not just about how much you have earned; it is also about how much of those resources you get to keep after taxes.

Why We Are Committed to Biblically Responsible Investing

Biblically Responsible Investing (BRI) is an investment approach that integrates faith-based values with financial decision-making. Rooted in biblical principles, BRI seeks to align investments with moral and ethical standards while pursuing financial returns. BRI is a cornerstone that offers our clients the potential to generate a positive impact beyond financial gains.

We’re committed to helping you experience financial contentment and peace through a plan that’s right for you, and by aligning your investment with your Christian values. It’s about understanding how you want to live and what you want to do. Whether you want to spend time with family or volunteer to make the world a better place, we help you prepare to spend your time, talents, and resources on what matters most to you.

Implementing faith-based investing begins just like any other investment
management process – we’re looking for great investments!

I hope you’ve found this review to be educational and helpful. Our goal is to be a guide to you as you run the race and keep the faith. 

Trust in the Lord with all your heart, on your own intelligence do not rely; in all your ways be mindful of Him, and He will make straight your paths.  -Proverbs 3: 5-6

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