Q4/2024

With the New Year just underway, it's important to reflect on key events of 2024 that shaped global economies and markets, as this can set the stage for what lies ahead.

Global equity markets proved to be incredibly resilient in 2024, with U.S. stocks leading the pack for a second year in a row. The S&P 500 saw impressive gains of 25.0%, driven by large tech-focused companies. While not as strong as the S&P 500, Canadian stocks still delivered strong returns, ending the year up 20.8%. This trend highlights how vital technology companies have become to the global economy but has also raised concerns about concentration risk. The market’s reliance on a handful of major players is becoming riskier, which makes diversification critical for managing exposure to these concentrated sectors.

Despite the FTSE Canada Universe Bond Index closing the year with a 4.2% gain, volatility remained a constant factor. Global inflation continued to improve and backed down from 6.7% in 2023 to 5.8% in 2024, which allowed central banks to become more dovish. The Bank of Canada led with a total of five rate cuts worth a cumulative 1.75%, while the U.S. Federal Reserve cut interest rates three times for a total of 0.75% over the same period. However, the persistence of inflation, especially in the U.S., has somewhat questioned this rate cut necessity. In addition, the rising protectionist trade policies expected during the Trump Presidency and unresolved geopolitical tensions may affect whether the U.S. Federal Reserve can sustain monetary policy dovishness.

On the political side, 2024 brought a big shake-up with Donald Trump returning to the U.S. presidency. His re-election has created some uncertainty around global trade and economic relationships, especially for Canada, whose economy is deeply tied to the U.S. through trade and investment. The possibility of tariffs returning and stricter trade agreements has become a real concern for Canadian policymakers.

Within Canada, long-standing economic challenges continued to hold back economic growth. Unemployment has increased, revealing structural issues within the job market, that are making it tough to create new opportunities or fully integrate workers. Weak growth in productivity exacerbated Canada’s ability to compete globally and slowed down economic expansion. Over the past decade, Canada’s GDP per capita growth has lagged many other Western countries, especially the U.S. On top of that, high household debt has kept consumer spending in check, sparking worries about Canadians’ financial health. A cooling housing market, with fewer new builds, only made things more difficult for a sector that has traditionally been an economic driver.

To compound the challenges, the federal government’s finances took a hit, with spending overshooting the 2024 budgeted deficit by an additional $23.3 Billion. This growing deficit highlighted the tension between addressing immediate economic concerns and staying fiscally responsible in the long run.

Globally, rising tensions in the Middle East, particularly between Israel and Iran, caused oil prices to spike, increasing uncertainty for investors and prompting a strategy review in case of disruptions to energy supplies.

China also faced its fair share of challenges, including a property market crisis and weakening consumer confidence. These domestic issues, along with fears of trade conflicts due to potential incoming U.S. tariffs only added to global economic jitters and disrupted capital flows, especially in emerging markets. Additionally, elections in places like Taiwan and the U.S. added more layers of uncertainty, affecting markets and investor confidence.

2025 Outlook

Although reflecting on the past is valuable, we believe that focusing on the future is even more critical, particularly given the headwinds we foresee in the capital markets for 2025. After the S&P 500 led global equities for the second year in a row, what does the investment industry expect for the year ahead? Most projections hover around a 10% return, a figure tied to the index’s long-term historical average, but markets rarely behave “on average.” Instead, history shows us that outcomes are often anything but predictable, defined by unexpected highs or lows that challenge conventional forecasts.

Recent data highlights how unpredictable markets can be. Bloomberg reports that analysts’ projections for the S&P 500 in 2025 range widely from a loss of 8% to a gain of 19%. While the average estimate matches historical trends, actual annual returns rarely stick to the “average.” In fact, since 1926, only a handful of years have ended anywhere near that so-called “average” range. It’s a clear reminder that the market has a way of surprising us.

To add more context, long-term expectations for the S&P 500 over the next 10 years are in the low single digits, much lower than what many investors might hope for or require. This makes it even more important to plan and be prepared to adapt as the year unfolds.

One of the primary pitfalls of market predictions is the conservatism approach that many analysts use. Forecasters tend to cluster their projections to avoid sticking out amongst the crowd or, in other words, take the safety of being wrong together rather than the risk of divergence from consensus. This tendency, however, often underestimates the likelihood of extreme outcomes. In 2025, actual results might fall well outside this range due to a number of forces at play, including but not limited to earnings growth and changing valuations.

It reinforces again that diversification is required across many asset classes in light of the uncertainty of returns. Given the nature of markets, averages can be useful benchmarks, yet rarely reflect reality. In that regard, a diversified investment approach can protect capital while creating opportunities, regardless of what happens to the markets. Discipline is key when attempting to confidently navigate the uncertainty of short-term fluctuations amongst the higher predictability of long-term returns.

Publicly traded stocks are likely to face a complex road ahead, shaped by a mix of economic conditions and geopolitical risks. Over the past year, we’ve often discussed how a handful of standout companies have heavily influenced the S&P 500’s performance. This dynamic is reminiscent of the “Nifty Fifty” stocks of the 1970s, market favourites known for their impressive earnings growth and dominant industry positions. These companies delivered incredible returns and seemed unstoppable, but their lofty valuations eventually caught up with them. When the bear market hit, much of their stock gains were wiped out, even though many continued to thrive as businesses.

Fast forward to today, and we see a similar pattern with the “Magnificent Seven” technology giants. These companies have produced exceptional returns and now wield outsized influence on the S&P 500. While their dominance is impressive, it raises questions about the broader market’s stability if investor sentiment were to shift. The parallels remind us that even when companies excel, extreme valuations and high market concentration create risks that investors shouldn’t overlook.

"The S&P 500 has reached its highest level of concentration in history, with the 10 largest stocks dominating the index. The impact on performance is remarkable, just the "Magnificent Seven" alone contributed 13% of the S&P's 23% return in 2024."

We anticipate that private assets will have a strong showing in 2025 and contribute significantly to portfolio performance. Private equity is poised for a resurgence, with pent-up demand driving buyout activity across the U.S. and Europe. Sectors like software, technology, and services are expected to lead this momentum, supported by robust market fundamentals and ongoing innovation. These industries stand out for their adaptability and growth potential, even in challenging economic conditions.

The private equity secondaries market is also gaining momentum and for good reason; it’s a great way to diversify portfolios while accessing seasoned investments with lower-risk profiles. By entering established funds at discounted valuations or with more predictable cash flows, investors can find opportunities that strike a balance between growth potential and reduced uncertainty.

Direct lending continues to be an appealing option, offering a great mix of income generation and capital preservation. While returns have come down a bit from their recent highs, they’re still strong, thanks to the growth and diversification of the private credit market. This space has expanded significantly, now including a broader range of borrowers and tailored lending structures, giving clients access to more opportunities to achieve steady returns while managing risk.

Real assets, particularly infrastructure and real estate, present another opportunity. Infrastructure is driven by two powerful trends: digital transformation and global energy transition. Increasing demand for data centers, propelled by advancements in AI, and growing investments in renewable energy are creating a fertile ground for strategic investments. In European real estate, low entry prices and abundant assets make the market particularly appealing, with logistics and office renovations aimed at carbon neutrality offering strong potential returns. While some regions of the U.S. real estate market face challenges such as office oversupply, demand for residential assets remains robust.

As private assets continue to evolve, they’re proving to be an essential part of a well-rounded investment strategy. With their resilience, adaptability, and growth potential, they’re especially valuable for navigating today’s unpredictable market environment.

Beyond these specific sectors, the broader investment landscape for 2025 will likely be shaped by geopolitical and economic shifts. Trade policy remains a key area of concern, with potential tariffs or restrictions creating uncertainty for businesses and investors alike. At the same time, deregulation efforts and the rapid adoption of AI technologies are introducing new variables to the equation.

As we enter the New Year, the key strategy, which has not changed, lies in balancing caution with opportunity. Markets are unpredictable, but a well-diversified portfolio, coupled with an active and strategic approach to investment management, will provide a steady foundation with more predictable returns.

At Kinsted, we remain committed to guiding our clients through the challenges and opportunities ahead, leveraging historical insights and forward-looking strategies to help them achieve their financial goals.

2025 is set to be an eventful year, bringing its fair share of challenges and opportunities. By staying true to our focus on the long term and applying a disciplined approach, we are confident in our ability to navigate uncertainty and uncover new opportunities for growth and success.

Regards,
Kinsted Wealth