On the surface, U.S. stocks had an outstanding year in 2024, largely due to the performance of the seven largest holdings in the S&P 500 index, known as the "magnificent seven." These seven companies alone represent over one-third of the index. As a result, the 25% return of the S&P 500 might somewhat overstate what was achieved by the average investor due to concentration issues. If we examine the representation of the top ten holdings of the S&P 500 over time, we can see their weight rise from the low twenties a few decades ago to roughly 39% today. This current value is even more striking when compared to a three-decade-plus average of just 22%.
Consequently, the performance of just a few stocks can significantly impact the return of the index, overshadowing the performance of hundreds of other companies.
To demonstrate just how large some companies in the S&P 500 have become, let's take a look at what I like to call “The Trillion-Dollar Club”. Please keep in mind, before August 2018, no companies exceeded $1 trillion in market capitalization. Today, there are three companies in the S&P 500 with market capitalizations over $3 trillion, two more exceeding $2 trillion, and three more exceeding $1 trillion. In comparison, it takes roughly 11 large healthcare companies, 8 financials, 20 consumer defensive, 34 industrials, and 53 consumer cyclical companies to come close to the value of Amazon, Microsoft, or NVIDIA. When looking at the smaller S&P 500 companies, we must combine the smallest 181 to exceed $3 trillion.
Upon closer examination, U.S. stocks indeed had a strong year, but the returns were closer to the low teens rather than the mid-twenties. Specifically, if we address the concentration issues of the traditional market capitalization-weighted S&P 500 index by equally weighting each of the 500 companies, large company stocks returned 13.0%. Outside of large companies, domestic medium-sized companies rose by 13.9%, while smaller U.S. companies increased by 8.7%.
Overseas investments were less favorable. Except for Chinese stocks, which rose by 19.4%, emerging markets excluding China returned 3.6%, while foreign developed stocks had modest returns of 3.8% for larger companies and 2.5% for smaller companies.
As previously mentioned, foreign stocks had a lackluster year, mostly attributed to their fourth-quarter sell-off. In fact, for the first nine months of the year, foreign-developed large company stocks were up nearly 13%. As we approached the U.S. election, however, President Trump began to lead in the polls, and foreign stocks began to fall. The fall, however, was attributed to changes in currency and not necessarily the underlying fundamentals of those foreign companies. When looking at the U.S. dollar index, we can see a rapid increase in value over just a few months.
As such, when looking at foreign-developed large company stock performance, the 11.3% return achieved in local currency, is much greater than the 3.8% return U.S. investors achieved once stock values were converted to U.S. dollars
In 2024, interest rate changes were mixed. At the end of 2023, short-term interest rates (i.e. 1-month, 3-month, and 6-month rates) were much higher than longer-term interest rates (i.e. 10-year, 20-year, or 30-year rates).
As inflation pressures eased during the year, the Federal Reserve responded with three cuts in short-term interest rates for a total reduction of 1.0%.
While the Federal Reserve lowered short-term interest rates, solid economic growth, and the resilient labor market helped long-term interest rates increase. As a result, interest rates looked a bit more normal by year-end with longer-term interest rates higher than shorter-term interest rates.