Mark on the Markets
January 2025
Reflecting on 2024, Looking Forward to 2025
2024 was a year of unexpectedly strong market performance. Major stock market indices generated historic gains with the S&P 500 returning 25.0% with dividends, the Nasdaq 29.6%, and the Dow Jones Industrial Average 15.0%. This occurred despite concerns around inflation, recessions, Fed policy, and the presidential election. International stocks also performed well with emerging markets rising 8.1% and developed market stocks gaining 4.3%.
This past year underscores the importance of staying invested during periods of uncertainty. While trying to time the market or holding cash may often feel more comfortable, the opportunity cost of doing so is high. There is no doubt that 2025 will present similar challenges for investors. At Financial Cornerstones, we will continue to work diligently in building portfolios that deliver returns and are aligned with Christian values.
The Bull Market Reached its Two-Year Anniversary in 2024
The S&P 500 reached 57 new all-time highs during 2024 and ended near all-time highs, although markets did pull back slightly at the end of December. This performance adds to the remarkable gains since the market bottom in late 2022 which, in hindsight, marked the beginning of the current bull market. The market has experienced the best two years of performance since the late 1990s, with the stock market gaining 57.8% across 2023 and 2024.
In fact, there were only two periods of heightened market volatility last year. This may be surprising given how nervous investors were throughout the year. These occurred in April and August when the market pulled back 5% or more due to concerns around inflation, the Fed, and tech stocks. However, each episode was followed by a sharp rebound.
The next chart puts bull and bear market cycles in perspective. History shows that bear markets are unpleasant, but they tend to be brief compared to bull markets. While it’s hard to say how long the current expansion will last, it’s important for investors to position for the full cycle and not just for downturns.
Of note, policy rates did decline a full percentage point due to Fed rate cuts, despite longer-term interest rates remaining elevated. The 10-year Treasury yield, for instance, ended just under 4.6%, after fluctuating between 3.9% to 4.7% throughout the year. The overall bond market was slightly positive with a gain of only 1.3% due to these rate movements.
Most Sectors Experienced Strong Returns Last Year
Markets did not just perform well at the broad index level - many sectors benefited from the strong positive trends as well. Markets have been driven by artificial intelligence and technology stocks over the past two years, and sectors such as Information Technology and Communication Services outperformed again. However, many other sectors experienced strong double-digit returns as well, including Consumer Discretionary, Financials, Utilities, Industrials, and Consumer Staples. In fact, the Financials sector was the best performing sector during the middle of the year.
This emphasizes the importance of diversifying across various parts of the market. It’s difficult to predict which asset classes, sectors, and styles will outperform in any given calendar year. Having exposure to each of these areas in a diversified portfolio is often the best way to stay balanced
Waiting for Pullbacks Can Be Counterproductive
With markets near all-time highs, it’s natural for investors to wonder if they should “wait for a pullback.” It is certainly true that markets never move up in a straight line, and there can be periods of volatility and short-term market declines.
The challenge is that these periods are difficult to predict and waiting for them can be counterproductive. Markets naturally achieve many new all-time highs during bull markets. And while there were two meaningful market swings this past year, major indices continued to achieve new highs throughout the year. Even when the market did pull back, it was at a higher level than where it began. In other words, it would have been better to have simply been invested the whole time.
Mark on the Charts
A pullback in the S&P 500 was in store for December, sliding 2.4%. But the trend is still up as shown by the blue dotted line. With the election now behind us, and all eyes are fixed on what 2025 will bring, we are still watching a choppy market move higher.
The Value Line Geometric Index is still in an uptrend; however, the damage was a bit more extensive than the S&P 500. However, the adage we live by as professional market technicians is “The trend is your friend!”. And for the present, the trend line is still positive. (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.)
Are Stock Prices Positioned for Perfection in 2025?
Despite potential headwinds, such as the risk of sweeping new tariffs, investors remain optimistic about the incoming administration’s focus on economic growth via deregulation and tax reforms.
But what could derail this momentum?
1. Melt-Up Risks
The S&P 500’s forward P/E ratio stands at 23, compared to the 5-year average of 19.7 and the 10-year average of 18.1. Historically, peaks include 25 in 1999 and slightly higher in 2021, the latter contributing to a non-recessionary bear market sparked by unexpected rate hikes
While valuations are elevated, they don't necessarily signal a bubble. P/E ratios reflect investor sentiment about future earnings and can remain high or low for extended periods. A broader view, such as the cyclically adjusted P/E (CAPE) ratio, shows it at 38.1—below the 1999 peak of 44.2 but above the 1929 peak of 32.6 (Online Data from Robert Schiller).
Incorporating inflation-adjusted Treasury yields, the excess CAPE yield is at 1.46%, below the long-term average of 2.43% but well above lows seen in 1929 (-0.61%) and 1999 (-1.52%). This measure suggests stocks are not undervalued but also not in extreme bubble territory.
2.The “Pros” are Sometimes Right, Sometimes Wrong…
Major institutions forecast the S&P 500 to reach 6,500–6,600 in 2025, implying a 10% gain. Deutsche Bank and Oppenheimer are more optimistic, projecting targets of 7,000 and 7,100, respectively.
Catalysts for growth include:
- Stronger economic momentum
- Deregulation boosting earnings
- Increased AI-related investments
- Active M&A activity
- Rising stock buybacks
- U.S. economic resilience
However, risks remain. Potential tariffs and persistent inflation could prompt the Fed to reverse its rate-cutting stance, creating uncertainty. Proverbs clearly states that we do not know what a day may bring forth, and prognostications must be taken cautiously.
3. Economic Data: Payrolls and GDP Remain Positive
Nonfarm payrolls rebounded in November, adding 227,000 jobs after a hurricane-impacted October. Private-sector gains remain tepid outside health care, which accounts for nearly half of private-sector job growth this year.
Meanwhile, GDP growth has been robust, averaging 2.9% quarterly since Q3 2022. The Atlanta Fed’s GDPNow model projects 3.3% growth in Q4.
This strong economic backdrop contrasts with the Fed’s reaction to slower payroll growth, which led to 75 basis points in rate cuts since September.
Inflation, while improved, remains above target. Core CPI has plateaued at 3.3%, keeping pressure on the Fed.
Despite this, markets overwhelmingly anticipate another rate cut in December.
4. Earnings Continue to Impress
With nearly all S&P 500 companies reporting Q3 results, earnings are projected to rise 9.0%, exceeding earlier estimates of 5.3%. Revenue growth has also been revised upward, supported by broad economic strength.
Excluding energy, profits are expected to climb 11.7%, with revenues up 6.4%. Strong sales, underpinned by a resilient economy, continue to drive higher profits.
Bottom Line
While valuations remain stretched, the market benefits from robust economic growth and favorable earnings trends. However, risks tied to inflation, Fed policy, and geopolitical events cannot be ignored. Investors must weigh optimism against the potential for unexpected shifts in market conditions, and that’s what we do!
Asset Classes Performance Through 2024
1. Harvesting Losses
Throughout 2024, gold and U.S. stocks delivered strong performances, while U.S. bonds underperformed, and foreign bonds declined.
Additionally, here’s a chart showing the performance of target-date funds for 2024.
Timely Tax Tidbits
Four Key Takeaways About the SECURE Act 2.0
Two years into the SECURE Act 2.0, enacted in December 2022, both opportunities and confusion remain as more than 90 provisions are phased in over the next decade. Here are four crucial updates for 2025 that investors need to know:
1. Changes to Required Minimum Distributions (RMDs) and Penalties for Missed Withdrawals
The SECURE Act has updated RMD rules:
- Those born between 1951 and 1959 must begin RMDs at age 73.
- Those born in 1960 or later will start RMDs at age 75.
Penalties for missed withdrawals:
- The penalty has been reduced from 50% to 25%.
- If corrected within two years, the penalty is further reduced to 10%.
- To correct missed RMDs, file Form 5329 with your federal tax return for the relevant year.
Planning tip: The delay in RMDs allows for extended opportunities to perform Roth conversions and strategic distribution planning. If you have large traditional IRAs, consider using these extra years to optimize your tax strategy.
2. Rolling Over Unused 529 Plan Funds to Roth IRAs
Secure Act 2.0 permits tax- and penalty-free rollovers from 529 accounts to Roth IRAs after 15 years. Key details:
- Beneficiaries can roll over up to $35,000 in their lifetime.
- Rollovers count toward the annual Roth IRA contribution limit ($7,000 for most).
Why this matters:
This is a significant benefit for families who overfunded 529 plans and faced potential tax penalties for non-educational withdrawals. Now, unused funds can support the beneficiary’s retirement savings.
Planning Tip:
Wealthier families might consider funding 529 plans early (e.g., at birth) and rolling over funds annually once the account has existed for 15 years and the child has earned income. Proper planning could grow a child’s Roth IRA to over $1 million by retirement.
3. Expansion of Qualified Charitable Distributions (QCDs)
The Act enhances QCD benefits for IRA owners aged 70½ or older:
- The annual QCD limit of $100,000 will now adjust for inflation. In 2025, the limit increases to $108,000.
- A one-time QCD of up to $54,000 can be made to charitable remainder trusts or charitable gift annuities (CGAs).
Why this matters:
This expanded flexibility allows taxpayers to reduce their tax liability while supporting charities in new ways. For instance, a CGA can provide a lifetime income stream to the donor while offering significant tax advantages.
Planning tip:
Ensure your QCD is made directly from your IRA to the eligible charity by year-end, particularly if you want it to offset your RMD.
4. No More RMDs for Roth 401(k)s
Roth employer accounts are now exempt from RMDs during the account owner’s lifetime, aligning with Roth IRA rules. This change simplifies retirement planning and equalizes treatment across Roth accounts.
While the SECURE Act 2.0 includes numerous provisions, these four updates are among the most impactful for investors in 2025. Stay informed and take advantage of these changes to optimize your financial and retirement strategies.
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.
Let’s explore the reasons…
Ethical Alignment
One of the primary advantages of BRI is its alignment with personal or organizational values derived from biblical teachings. By adhering to principles of honesty, integrity, and justice, BRI ensures that investments support companies and industries that operate in accordance with these values. Investors can avoid involvement in activities deemed unethical, such as promoting abortion, pornography, anti-family values, or the exploitation of labor, thus maintaining a clear conscience regarding their financial decisions.
Positive Impact
BRI enables investors to contribute to positive social and environmental outcomes. By directing capital towards companies that prioritize sustainability, corporate responsibility, and community welfare, investors can promote practices that benefit society at large. This approach encourages companies to support a healthy nuclear family, adopt environmentally friendly policies, support fair labor practices, and contribute to philanthropic causes, thereby fostering a more sustainable and equitable world.
Risk Management
BRI incorporates a risk management aspect by avoiding investments in companies with questionable ethical practices or those involved in controversial industries. By excluding such companies from the investment portfolio, BRI 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.
Long-Term Performance
Contrary to the misconception that ethical investing compromises financial returns, studies have shown that BRI can deliver competitive or even superior long-term performance. Companies committed to ethical business practices often exhibit qualities such as strong governance, innovation, and resilience, which are conducive to sustainable growth and profitability. Additionally, BRI may attract a growing segment of investors who prioritize ethical considerations, thereby increasing demand for investments aligned with biblical values and potentially enhancing their value over time.
Spiritual Fulfillment
For many investors, BRI provides a means to integrate their faith with their financial stewardship. By investing in accordance with biblical principles, individuals can experience a sense of spiritual fulfillment, knowing that their financial resources are being utilized in ways that honor God and contribute to His purposes on earth. This alignment between faith and finance fosters a deeper sense of purpose and meaning in investment decisions, transcending mere monetary considerations.
In Summary
At Financial Cornerstones, we understand that Biblically Responsible Investing offers a holistic approach to wealth management, integrating financial objectives with moral and ethical values derived from biblical teachings. By aligning investments with principles of integrity, compassion, and stewardship, BRI enables investors to make a positive impact on society while pursuing competitive financial returns. Beyond financial gains, BRI provides spiritual fulfillment and a sense of purpose, empowering individuals to use their resources in ways that honor God and advance His kingdom. As awareness of faith-based investing continues to grow, BRI stands poised to play an increasingly significant role in shaping the future of finance, promoting sustainability, social responsibility, and ethical integrity in the global economy.
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.
It’s one more value offering that we provide to you!
Implementing faith-based investing begins just like any other investment
management process – we’re looking for great investments!
Contact Us for a Free Consultation