Q4 Letter - 2024
2024: The Bull Rages On
US stock market indexes continued to rally to record highs as the Fed continued easing financial conditions by lowering the overnight borrowing rate 25bps again in December, bringing the cumulative reduction to 1% for this rate cycle. Additionally, election uncertainty faded, and consumer and business confidence both rose materially since September. Given these tailwinds and the impressive performance of the S&P 500, posting just over 20% gains in both 2023 and 2024, it begs the question: shouldn't we expect some cooling off? History says “not yet.” Since 1950, the S&P 500 has posted a 20% gain on a price-only basis 21 times, and in 17 of those instances (81%), it was higher a year later. In fact, after two consecutive +20% gains, the S&P has averaged another 20% gain in the 3rd year, delivering positive returns in all four occurrences. This compares to the index's long-term average annual return of 9.5%, with gains occurring 72% of the time.
What fundamentals could support further gains? Looking ahead, business investment is poised to rise in 2025, driven by a surge in business confidence during Q4 2024 and increased spending on infrastructure to support AI development. Notably, Microsoft announced plans to invest $80 billion in datacenter construction in 2025, up more than 42% from 2024, of which over half will be in the U.S., a move that will continue to create significant trickle-down effects across the economy. Adding to the optimism of business leaders is the likely reinstatement of investment tax incentives coupled with deregulation by the Trump administration, which could unlock a wave of mergers and acquisitions. This, in turn, would inject much-needed liquidity into markets that have been constrained over the past two years and thus reignite the capital deployment cycle, fueling broader business activity.
Meanwhile, changes to immigration, trade, and fiscal policy under the second Trump administration are expected to be less dramatic than many had feared. Wall Street has increasingly come to interpret Trump’s posturing on these topics as a calculated negotiation strategy, suggesting that tariff threats under his administration are likely to be more selective and targeted rather than sweeping in scope. Goldman Sachs projects inflation will slow to 2.1% by the end of 2025 but could hover around 2.4% if their baseline projection on tariffs—focused primarily on China and the auto sector—materializes.
As we noted in our previous letter, this reinforces the idea of a more resilient and adaptive economy, highlighting a critical dynamic: technology spending has become a necessity for corporations to remain relevant and competitive in the face of rapid technological advancement, driven by AI. As a result, this investment is less sensitive to interest rates, further diminishing the economy's reliance on traditional, rate-driven dynamics given the proportion of our corporate earnings that come from our largest technology companies. This is what we call a secular bull market. This stat made me do a double-take, and I’m still trying to wrap my head around it: roughly 45% of the S&P 500’s earnings in 2025 are projected to come from just the 8 largest technology companies. It’s a staggering reminder of how much scale and diversity in business models the tech sector has amassed throughout the last 15 years.
Q4 2024 Earnings Preview
Earnings season kicks off this week, with the S&P 500 projected to deliver 11.7% year-over-year earnings growth for Q4 2024. This would mark the highest growth rate in three years (31.4% in Q4 2021). Historically, most S&P 500 companies outperform earnings estimates, indicating the index is likely to exceed this projection and approach ~14% for the quarter. In fact, the actual earnings growth rate has exceeded the estimated earnings growth rate at the end of the quarter in 37 of the past 40 quarters for the S&P 500. The only exceptions were Q1 2020, Q3 2022, and Q4 2022.
The robust earnings growth expected for Q4 2024 could provide a tailwind for the market through the remainder of January – a historically bullish signal for the start of the year. This growth reflects corporate resilience, even amid the uncertainties surrounding the election and rising geopolitical tensions in Q4. Additionally, these strong results are likely to fuel optimism for more positive surprises ahead. However, sustained optimism throughout 2025 will depend on broader macroeconomic conditions, particularly the strength of the labor market as that has emerged as the most critical factor in determining the trajectory of future rate cuts.
2025’s Navigational Beacons: Rate Cuts, Labor Market Strength, and the Pendulum of Market Expectations
The Fed’s rate cut path will hinge on how the labor market conditions evolve which is fueling consumer spending and has been getting a boost from wealth effects, making it a key variable to monitor when determining the pace and depth of future reductions. As a stronger economy has increasingly become the consensus, longer term rates have reflected that projected strength. The Fed has taken notice and indicated that it probably would only lower rates twice more in 2025, according to the closely watched “dot plot” matrix of individual members’ future rate expectations, which would be two less than the market was expecting prior to the election.
The December jobs report came in better than expected with an addition of 256k in nonfarm payrolls and unemployment declined slightly to 4.1%, empowering the Fed to stay on course and only cut twice this year, and some are now calling for even one, maybe none. However, as suggested, it appears that the pendulum may have swung overly hawkish. The market-implied probability of a rate hike in the next 12-months has risen sharply since the November elections, up to 35% from 5% right before the election (see chart below).
As of the time of this writing (1/13/2025), it appears likely that the momentum in bond selling has likely pushed yields too high, creating a lopsided consensus that rates are going to march even higher. Since this move is only a few weeks old, it’s too early to confirm a sustainable trend shift. Instead, it seems more plausible that a new range is forming, with yields likely settling in the mid-4% range — a view that has become increasingly contrarian as January unfolds.
Navigating 2025: Staying Ready, and Appropriately Positioned
As we enter 2025, we remain cautiously optimistic despite a bumpy start to the year. While Q4 results will hold significance, the spotlight is on the forward guidance companies will provide for the year ahead. Risks, as always, are on the horizon—but the fundamentals of the economy remain strong. The labor market is resilient and actually strengthened in December, demographic tailwinds continue to support consumer spending and thus growth. Consumer balance sheets are at all-time highs, and sentiment has improved dramatically over the past two months, a strong leading indicator of near-term spending.
Our focus remains on proactive portfolio management, keeping a sharp eye on what the markets are expecting and what they are pricing in. By staying attentive and adaptive, we aim to manage risk effectively while positioning portfolios to take advantage of opportunities as they arise when the expectations become too extreme, one way, or the other.
It’s worth highlighting that the Federal Reserve continues to operate from a position of strength, with the flexibility to loosen financial conditions swiftly if labor market conditions deteriorate. Even if inflation holds around 2.5% or ticks slightly higher, this is unlikely to deter the Fed from addressing unemployment concerns, which is the most important indicator of consumer spending and thus corporate earnings.
In such an environment, holding assets like stocks is important as inflation erodes the value of cash. Asset prices are likely to remain supported, even if demand moderates, given the Fed’s capacity to reduce interest rates from current levels. This dynamic highlights the importance of identifying companies and sectors that stand to disproportionately benefit, underscoring the critical role we play as asset allocators in seizing these opportunities.
As always, we are grateful for the trust you place in us to guide you through these dynamic market conditions. If you have any questions or concerns, please don’t hesitate to reach out.
We wish you and your loved ones a prosperous, healthy, and happy 2025. Let’s move forward together—with confidence and focus. Onwards!
Information presented reflects the personal opinions, viewpoints and analyses of the employees of Mirador Capital Partners, LP, an SEC-registered Investment Adviser. The views reflected in the commentary are subject to change at any time without notice. Nothing herein constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Mirador Capital Partners, LP manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. Visit us at miradorcp.com for more information.