Fourth Quarter 2024 Market Commentary

Major Index Performance

It was a return to normal of sorts, as the tech-heavy Nasdaq led the way to close out the fourth quarter and finished as the strongest performing major index for the year, returning 6.35% for the quarter and nearly 30% for the year. With its blended basket of tech and old economy companies, it’s not surprising that the S&P 500 was the second-strongest performing major index for the quarter and the year, returning 2.41% and 25.02%, respectively. The Russell 2000, the small-company index, eked out a 0.33% gain for the quarter, bringing its 2024 return to 11.54%. This slightly outperformed the Dow Jones Composite Average for the year, which returned 11.46% but declined 0.68% in Q4. Finally, major international indices posted around 8.00% declines in Q4, but despite a poor quarter, they were able to generate positive returns for the year.

U.S. Sector Performance

A similar “return to normal” story can be said of U.S. sector performance, as the growth-oriented sectors shone brightest in Q4.

The consumer discretionary sector’s strong performance was driven by Amazon and Tesla, which returned 17.74% and 54.36%, respectively. Notably, Tesla returned 60.61% since November 5th, or Election Day in the United States. Up to that point, the EV company was only up 1.19% for the year, suggesting significant benefits might accrue due to Elon Musk’s close relationship with now-President Donald Trump.

The communication services sector was the second-best performer, with Alphabet and Netflix as the largest contributors to the quarter’s strong performance, returning 14.15% and 25.67%, respectively. Despite finishing second for the quarter, the sector was the top performer for the year, generating an astonishing 34.70% in 2024.

To round it out, financials returned 7.10% for the quarter and were the second-best performing sector in 2024. This may seem surprising given that A.I. dominated the headlines this year, but digging into the fundamentals reveals a clearer picture. Better-than-expected economic news and a steepening yield curve pushed bank performance upward for the year. Yield curve steepening is particularly important to bank profitability, as banks pay on deposits (sensitive to short-term rates) but lend on longer-term rates. So, when longer-term rates rise relative to short-term rates, banks enjoy more profit when lending.

S&P 500 Top/Bottom Performers

Year to Date

Fourth Quarter

Palantir Technologies (PLTR) – The Peter Thiel-Backed Big Data Analytics Service Provider

Palantir Technologies is a software company specializing in big data analytics. Basically, the company feeds vast amounts of data into its A.I. applications and machine learning platforms, which then turns around and provides insights to assist Palantir's clients in making better, more informed decisions. These decisions can range from helping businesses understand which products to market to assisting U.S. intelligence agencies in counterterrorism operations. Palantir operates in both the government and corporate sectors.

For the quarter, the big boost in Palantir’s stock price can be concretely attributed to better-than-expected revenue and earnings results and speculatively attributed to Peter Thiel’s close relationship with Donald Trump. For instance, Palantir’s stock rose 47.92% since November 5th. The expectation that Palantir will secure more government contracts under Trump’s presidency likely fueled this surge, compared to what might have been expected under a Harris administration.

Tesla Inc (TSLA) – A Big Bet on the Trump/Elon Relationship

As mentioned previously, Tesla rallied significantly in Q4, returning approximately 60% since the election results came to fruition on November 5th. Like Palantir, this significant rally can be attributed to the expectation that Tesla will economically benefit from Elon and Trump’s close relationship. To illustrate the closeness in the relationship, Elon is now heading Trump’s Department of Government Efficiency, with the task of eliminating excess government spending and waste. Yes, the department’s shorthand name is DOGE, which is also the ticker of Elon’s favorite cryptocurrency, Dogecoin. Elon being Elon.

However, how this relationship justifies a $489 billion increase in Tesla’s market value remains unclear. Trump’s plans to phase out green initiatives from the previous administration and increase tariffs on China—a key supplier and customer for Tesla—raise questions about the sustainability of Tesla's recent surge.

Lululemon Athletica (LULU) – The Beaten Down Athleisure Company Still Has Fight

Lululemon has been on my radar as I’m personally a big fan of their products. I treat their 5-Year Basic T-Shirt pack as an annual subscription, re-upping during year-end sales. Whether lounging at home or out and about, I often wear Lululemon’s ABC pants or tees, making them a staple in my wardrobe.

Despite my small contribution to annual profitability, the stock struggled in 2024 due to a failed product launch of the Lululemon Studio (including the unsuccessful Mirror), increased competition in the athleisure market, and the departure of Chief Product Officer Sun Choe mid-year. By the end of June, the stock was nearly halved from its all-time high. However, it rebounded by 28% in the second half, with a majority of gains in Q4, thanks to better-than-expected financial results in December. In comparison, the S&P returned 8.44% over the same period.

I bring up my wardrobe and stock market performance because it underscores Peter Lynch’s philosophy: “Invest in what you know.” If you trust a company’s products and see its stock stumble, it might signal a buying opportunity—provided your satisfaction with the company’s offerings remains unchanged. For full disclosure, I'm not a LULU stockholder currently. But, I'm very interested in observing my spending habits as a means to find undervalued companies.

International Indices

Developed Markets

Don’t let the color rankings deceive you—international developed stocks fared poorly in Q4, with no major country posting positive performance. All were in the red.

Japan performed the best (or least poorly), declining 4.74%. France was the worst, with a 10.52% decline, narrowly underperforming Australia by just one basis point.

It’s undeniable that U.S. election results heavily influenced the declines. Trump’s explicit plan to reintroduce tariffs on imports negatively impacted companies reliant on U.S. demand. For example, Louis Vuitton Moet Hennessy, a French luxury goods company heavily reliant on U.S. exports, fell 14.21% in Q4, a factor for why France performed poorly.

I say a factor because it probably wasn't the major factor for France's poor performance as the country had a host of political and government issues emerge in December. The Barnier government, led by Prime Minister Michel Barnier, collapsed following a vote of no confidence after he released a deeply unpopular 2025 budget proposal. For context, this marked the first time a Prime Minister had received a vote of no confidence since 1962. This ultimately led Barnier to tender his resignation, and in an attempt to restore confidence during the calamity, Emmanuel Macron appointed François Bayrou as the new Prime Minister.

Political turmoil and uncertainty inevitably lead to economic instability, making it challenging for businesses to make long-term financial decisions and generally sapping consumer confidence. Given this loss of confidence in the country, investors likely decided to sell and redirect their money to better risk-adjusted assets as France works to resolve its issues.

Emerging Markets

Similar to developed international countries, all emerging market countries declined in the fourth quarter, and broadly speaking, this was primarily due to Trump tariffs.

Taiwan was only slightly down, declining 0.78%, but the Taiwan Semiconductor Manufacturing Company (TSMC) kept it from sinking, posting a positive 14.08% in Q4. TSMC accounts for approximately a quarter of Taiwan’s stock index, making it a significant contributor to Taiwan’s overall market performance. The company is closely tied to expectations around A.I. demand, as it holds the largest market share in chip manufacturing and foundry services worldwide. Thus, when A.I. capital spending expectations rise, TSMC’s stock performance tends to follow.

Similar to France, South Korea also has significant political turmoil in Q4. On December 3rd President Yoon Suk Yeol declared martial law, citing threats from "anti-state activities" and alleged collaboration with North Korean entities from within the government. This decree suspended political activities, including sessions of the National Assembly, and restricted press freedoms. Following significant backlash, the very next day, Yoon lifted the martial law declaration and shortly thereafter Yoon was impeached which led to his suspension from office. His actions led to significant political instability which led to economic consequences, which, like France, caused investors to reassess their views of South Korean stocks with them coming to the conclusion that now is a good time to sell.

Looking at Brazil’s performance it’s probably fair to wonder what happened politically in South America's largest country. Well, nothing of note. Generally speaking, Brazil’s markets performed poorly due to poor commodity performance, particularly in metals. Iron, Copper, and Nickle which are major Brazilian exports, declined 8.48%, 11.05%, and 12.88% respectively. Poor metals commodity performance is likely why South Africa declined 12.41% as well.

U.S. Fixed Income

The Yield Curve

Yields rose across the curve, except for the 3-month Treasury rate. The Federal Reserve cut rates by 0.25% in Q4, which obviously impacted short-term yields more than long-term yields. This likely explains why the 3-month rate was the only maturity along the yield curve to decline.

Taking a step back, short-term yields are much more influenced by immediate Federal Reserve interest rate decisions, whereas long-term yields are more impacted by expectations for future Federal Reserve interest rate decisions and inflation. This is largely borne out by the data: longer-term yields rose, whereas shorter-term yields (less than 5 years) showed less movement. This leads us to the question of why long-term yields rose. Inflation accelerated in Q4 after modest declines in the first three quarters. This increase in long-term inflation expectations reduced the market's anticipation that the Federal Reserve would cut rates as quickly as previously expected in Q3.

These factors, along with Trump’s legislative spending agenda—which is expected to put upward pressure on prices—caused longer-term rates to rise across the board in Q4.

The Credit Curve

When examining credit spreads—which normalize for yield curve movements—spreads fell across the credit spectrum. The largest declines were observed in the lowest credit quality spreads, while the highest credit quality spreads remained essentially flat.

Credit spreads are closely correlated with stock market performance. If expectations are that stocks will generate higher returns, causing stock prices to rise, companies will also be expected to have more cash flow available to service their debt. This reduces perceived credit risk. As a company’s credit risk decreases, its credit spreads narrow accordingly.

Fixed Income Fund Performance

So, with a combination of rising longer-term rates but falling credit spreads, the performance of fixed income securities was mixed. Shorter-term securities held up relatively well, with the money market fund performing the best, generating a 1.32% return for the quarter. Interestingly, the money market fund ended up being the second-best-performing fixed income segment for 2024. Who said cash was trash?

Since longer-term rates rose and longer-term securities are more sensitive to interest rate movements, it’s no surprise that longer-maturity securities performed the worst, both for the quarter and for 2024. The extended-duration Treasury index, which is the most sensitive to long-term interest rate movements, lost 13.13% for the quarter and was the worst-performing fixed income sector for the year.

The high-yield bond index, which combines characteristics of fixed income and equity securities, ended roughly in the middle, declining 0.54% for the quarter. However, despite generally rising interest rates throughout the year, strong equity market performance in 2024 helped high-yield bonds perform the best among all fixed income segments, generating a 7.86% return for the year.

U.S. Economy

Real GDP grew at a 0.76% rate in Q3, annualizing to 3.04%. This figure is above year-over-year growth and roughly in line with long-term expectations for GDP in general. The largest contributor to growth was personal consumption expenditures (a fancy term which basically refers to you and I spending money), which grew 0.91% for the quarter. After private domestic investment's remarkable 2.02% growth in Q2, this component slowed significantly in Q3, growing only 0.20%. Government spending’s contribution ticked higher than usual, which leaves mixed impressions. While government spending can positively impact the economy when used effectively, its efficiency is questionable given the current debt load and budget deficit.

The unemployment rate remained flat for the quarter but remains elevated compared to a year ago. This provides mixed signals: while a stabilizing unemployment rate reduces fears of a rapidly deteriorating economy, a 7.89% increase in unemployment over the past year raises concerns about the broader state of the U.S. economy and where it is currently.

Unsurprisingly, with unemployment flat, payrolls and employment numbers were also steady. However, reduced claims for unemployment insurance were a positive development during the quarter.

Personal income growth continues to slow, albeit modestly, while median pay is accelerating. At first glance, there is nothing particularly noteworthy about these trends, as the quarterly and year-over-year changes remain generally in line with longer-term averages.

A more concerning trend is the acceleration of the Consumer Price Index (CPI) in Q4, which annualized to a 3.81% inflation rate. As discussed in the context of fixed income performance, higher inflation and expectations that Trump’s economic policies will increase inflationary pressures have led markets to anticipate that the Federal Reserve will approach rate cuts more cautiously.

Turning to residential real estate, the market remains puzzling. The number of new homes for sale increased, while existing homes for sale decreased. Meanwhile, new home sales declined, but existing home sales rose. The impact on prices? Median sales prices for existing homes were essentially flat, whereas prices for new homes fell.

Below we can see the convergence of new and existing home prices—a highly unusual situation, as new homes typically sell at a premium to older homes. This anomaly could reflect a shift in consumer preferences. Existing homes are often closer to major metropolitan areas, where people work and spend their leisure time, whereas new builds tend to be in suburban areas. So, homeowners may now be prioritizing location, location, location over newer fixtures and additional square footage.

While the macroeconomic implications of this trend remain unclear, the health of the U.S. economy remains closely tied to the residential real estate market. As long as total real estate transactions don’t fall significantly—which is possible given rising mortgage rates and ongoing affordability challenges—these unusual trends in the housing market are unlikely to become a major concern.

Looking Forward

Trump’s First 100 Days

The first 100 days of any presidency are the most important for enacting a policy agenda. Fresh off their victory, presidents typically enjoy significant political momentum, high approval ratings, and enough time to pass legislation before much of Congress shifts its focus to campaigning for re-election. Simply put, the vibes are high, and there’s time to get things done.

I’m paying particularly close attention to the first few quarters of executive and legislative activity under Trump’s leadership. Notably, Trump has stated that he intends to:

Increase tariffs on imports
Increase illegal immigrant deportations
Extend the 2017 TCJA tax cuts, while further decreasing corporate tax rates
Increase military and infrastructure spending
Decrease wasteful government spending through the Department of Government Efficiency (DOGE)
Increase domestic oil and gas production
Decrease regulation and antitrust enforcement
End the Israel/Palestine and Ukraine/Russia conflicts

Generally speaking, most of Trump's wish list items are inflationary. I expect that the fewer agenda items ultimately implemented, the lower inflation becomes as a risk factor. Individual company and sector performance will depend on which areas of the economy are affected by Trump's agenda and to what degree. After all, the impact of legislation will vary significantly across U.S. sectors and company sizes.

For instance, easing antitrust enforcement would likely benefit Big Tech. However, if significant tariffs and trade restrictions on China and other key suppliers to Big Tech are enacted, their stock prices could suffer. Meanwhile, a U.S. small-cap domestically operated clothing store might not be impacted to the same degree. This highlights the uneven effects that legislation can have on businesses and stock performance.

All of this to say, financial markets will be highly sensitive to Trump’s first few quarters in office, so expect some volatility as the outlook for what will and won’t get enacted evolves.

And let’s not forget the potential for an errant tweet to cause market volatility as well.

Concentrated Big Tech Risk and Reward

Given that a few names make up a large portion of the stock market, the overall performance of the stock market will largely depend on the performance of these few names. Shocker.

The names I'm particularly talking about are:

We can see that, despite their sector and industry classifications, these top companies are heavily concentrated in the technology sector. Because of this concentration, these companies share highly correlated risks, which, in my view, include the following:

Reduced Return on Capital Expectations: The massive investments these companies have made into the A.I. vertical (from chip development to end-use software products) could lower return on capital expectations. If investor sentiment sours, valuations and, consequently, stock prices could collapse.
Rising Interest Rates: Higher interest rates increase the cost of capital, which is particularly significant for tech companies heavily reliant on debt or leases or those with high valuations based on discounted future cash flows.
Increased International Supplier Risk: Taiwan Semiconductor Manufacturing Company (TSMC), a major supplier of chip wafering and manufacturing services, represents a significant supply chain dependency.
Rising Geopolitical Tensions and Deglobalization: These tensions could significantly disrupt the complex global supply chain for technology companies. Disruptions might lead to shortages of key inputs (e.g., chips) or even prevent companies from selling their products in certain markets due to trade restrictions.
Increased International Tariffs: Tariffs imposed by the U.S. and retaliatory measures by other countries could affect both upstream suppliers and downstream end-customer pricing, reducing demand.
Heightened Antitrust Enforcement and Other Regulatory Burdens: Although this risk is escalating in Europe, particularly as it relates to data privacy laws, it is less of a concern in the U.S. under a Trump presidency.
A Global Economic Slowdown: A broad slowdown in the global economy could reduce consumer and business spending and investment, affecting these companies' growth.

Given how intertwined stock market performance is with Big Tech, I recommend keeping these risk factors top of mind when reading the news, analyzing earnings releases, and staying updated on Washington’s economic policies and their potential implications. This commentary is prepared by and is the property of EID Capital, LLC and is circulated for informational and educational purposes only. There is no consideration given to the specific investment needs, objectives, or tolerances of any of the recipients. Additionally, EID Capital's actual investment positions may, and often will, vary from its conclusions discussed herein based on any number of factors, such as client investment restrictions, portfolio rebalancing and transactions costs, among others. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This material is for informational and educational purposes only and is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors which are necessary considerations before making any investment decision. Investors should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, where appropriate, seek professional advice, including legal, tax, accounting, investment, or other advice.

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