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Global stock markets returned 6.4% in the 4th quarter of 2024. Whilst this projects a very positive image for global markets, the reality is that most of the global stock market these days is comprised of America[1], most of the returns came from American companies, most of the returns came from the strong Dollar[2] and most of these came in the month of November!
It’s no coincidence that this lines up with the decisive clean sweep victory for President-Elect Donald Trump. The resounding victory for Trump and the Republicans allowed for the shroud of uncertainty to be removed which in turn allowed for all the good data we’d seen in October to reap its rewards. November was the best month for Global stock markets in well over 2 years!
Most other regional equity markets were rather pedestrian in Q4, with UK and Emerging markets tracking sideways, whilst Continental European markets sold off; weighed down by political turmoil in France and Germany. France ended 2024 with its 4th Government of the year (with Francois Bayrou becoming the Nations 4th Prime Minister of 2024 on 13th December) whilst Germany suffered the collapse of its coalition Government and now awaits a 23rd February 2025 election to attempt to restore political stability.
Bond markets sold off in the 4th quarter, with increasing yields being the price paid for better-than-expected growth in the case of the US and increased spending (and projected inflation) in the case of the UK.
Against this backdrop, UK 10-year gilts closed out the quarter yielding 4.57% which meant for losses over the period of 3.1% (increasing bond yields lead to decreasing bond prices). Although interest rates came down over the quarter (with the UK, US and European Central Banks all making interest rate cuts in Q4), there was a re-pricing of future interest rate cuts. Bond futures markets moved to price in just 2 interest rate cuts in both the US and UK in 2025; which put upward pressure on respective sovereign yields in these countries.
Whilst President-Elect Trump’s decisive election victory was undoubtedly the catalyst for the US stock market rally, it was a rally founded in both economic and corporate strength.
On the economic front, growth continued to surprise to the upside (with the US growing at a clip of 3.1% in the finalised Q3 estimate which was released in December), with inflation remaining stable. Crucially, strong US growth has been powered by a US consumer that continues to be willing to spend. This is key for US growth given that US Personal Consumption Expenditure constitutes c2/3rds of US growth and whilst there were some concerns earlier on in the quarter over the strength of the US jobs market, the quarter finished with robust data around this and no material sign of corporate layoffs (job losses) which can dent consumer confidence.
On the corporate side, earnings growth came in strong, with US companies surprising to the upside and delivering their 5th consecutive quarter of positive earnings growth.
Corporate profitability is the number one driver of long-run stock returns and US company profits, notably within the technology and consumer discretionary sectors, have powered much of the recent gains. These companies (which comprise Apple, Microsoft, Nvidia, Alphabet, Amazon, Meta and Tesla) are affectionately known as “The Magnificent 7”, owing largely to the “Magnificent” c100% growth in profits that they’ve generated (as a whole) over the last year!
The “Magnificent 7” lived up to their name in the 4th quarter, all besting their lofty earnings estimates. However, perhaps more encouraging for the breadth of the market, the 4th quarter saw strong numbers and resultant share price gains from a broader swathe of US companies such as Banks and Consumer discretionary names. Big US Banks evidenced a Consumer on a strong footing and one that, whilst being judicious with their spending, was still accessing credit and still keen to spend.
Crossing the pond and turning our attention to the UK, Q4 returns of -0.35% for UK equities are nothing to shout about but we’d note that Q4 did offer some shards of light for corporates and the economy.
UK corporates enjoyed their second consecutive quarter of positive earnings growth and whilst the broad index returns were insipid, there was some strong sector performance and a return of investor interest in the UK market.
Whilst the broad index was dragged lower by poor performance from heavyweight names in the Healthcare and Materials sectors, the UK Banking sector in particular posted excellent earnings numbers. UK Banks evidenced lower impairments (signaling that the UK consumer is at the very least less bad than overly pessimistic markets had been pricing!), increased guidance and share buybacks. This saw the UK Banking sector gain by c14.6% in Q4 which took returns for 2024 to just shy of 43%. With the October budget firmly in the rear-view mirror, December saw UK equity funds enjoy their first month of positive inflows since 2021 (a whopping 42 months!). One month doesn’t make a summer (or a Christmas in this case!) but it at least provides some hope of the tide being stemmed!
Despite having emerged from recession, the UK economy is far from purring. However, with real wage growth running at c2.5%, there’s latent potential for consumers to unlock their 10% savings rates and ignite the growth which is sadly absent. Chancellor Reeves’ budget did little to help on this score and perhaps the best one can say is that it is now known, it is behind us and since then we’ve seen signs of improvement return to both the housing market and consumer confidence more broadly.
Interest rate cuts continued to materialise in the 4th quarter, with both the US Federal Reserve and the European Central Bank finishing the year with interest rates 1% below their peak, whilst UK interest rates are 0.5% below their peak. In and of itself, such moves argue for lower bond yields, but we’d remind ourselves that bond yields are forward looking.
UK bond yields moved higher to price in higher future inflation (notably post the October budget), whilst US yields pushed higher to reflect an increased growth and spending backdrop that might come with the next Trump Presidency. This view, at least for the US, was confirmed in the December Federal Reserve meeting with the Committee signaling that there’d be just 2 further interest rate cuts next year as opposed to the 4 that were signposted (for 2025) at their September 2024 meeting.
2025 marks 2 full calendar years of this equity bull market and we believe it’s a market with a lot of room yet to run. Stock market strength has been underpinned by rising corporate profits, a resilient consumer and, more latterly, Central Bank easing: trends we expect to continue in 2025.
Returns may well moderate from the fast-paced levels of the last 2 years, particularly if concerns mount around debt levels and policy uncertainty from the World’s international players. Such uncertainty can cause short-term pain, but we’d note that Central Banks are in a strong position to cut interest rates aggressively should the need arise, which would be good news for Consumers, Corporates and Governments alike.
Furthermore, such cuts would also tease out some of the c$7trillion that is sitting in US money market funds. The path may not be a smooth one, but we expect this backdrop to be supportive of further asset price growth as we head into 2025 and beyond.
The source for all data is Bloomberg (unless stated otherwise)
The value of investments and the income from them can go down as well as up and you could get back less than you invested. Past performance is not a reliable indicator of future performance.
The content of this article is not intended to be or does not constitute investment research as defined by the Financial Conduct Authority. The content should also not be relied upon when making investment decisions, and at no point should the information be treated as specific advice. The article has no regard for the specific investment objectives, financial situation or needs of any specific client, person, or entity.
[1] The US constitutes 74% of the global developed share market as at end December 2024.
[2] The British Pound fell by 6.4% vs the US Dollar over the course of the 4th Quarter of 2024.
