2024 was an impressive year for risk assets, with North American Equities leading the charge. Continued US strength and election results helped the S&P 500 deliver total returns of 25.62% and 30.79% for the Nasdaq Composite. Canadian Markets were sluggish in the first half of the year but saw good performance in the second half, ending the year with a TSX composite total return of 21.65%.
Internationally, the momentum of US large-cap tech and US prospects of pro-business policies carried over to create momentum for stocks in developed markets around the world, with the MSCI World Growth index ending the year at 26.2% and the MSCI World Value Index. Emerging markets, shown by the MSCI EM index, ended the year with an 8.1% gain from a late rally in Chinese equities, combined with strong results in India and Indonesia.
While China had a good end to the year, their domestic demand for oil remained weak, resulting in a subpar 5.4% annual return for Bloomberg Commodity Index. However, gold experienced tailwinds, with concerns about the US fiscal outlook. The precious metal ended the year with an impressive 27.1% return.
Monetarily, the major theme last year for developed markets was the loosening of Central Bank policy, as they all began lowering interest rates in response to inflation showing adequate progress towards target levels. The market has been anticipating this since 2022, hoping for a relief in economic pressures caused by high rates. The rate cutting cycle has not been smooth, however. Surprising resilience of the US economy has created risks of re-flaring inflation. This has led markets to back track on expectations for the pace of US rate cuts soon after they had begun. This, combined with a strengthening US dollar in the back half of the year, caused rising yields to reverse returns on global investment-grade bonds. They finished off the year with a -1.7% return, tracked by the Bloomberg Global Aggregate bond index.
Let’s take a closer look geographically at where we are and where we could be heading in 2025:
USA
The US was the clear leader in 2024, both economically and from a market return perspective. The quarterly annual growth rate numbers from the Federal Reserve Bank of Atlanta’s GDP nowcast show a 2024 GDP growth number of around 2.7%. While the Magnificent Seven generated significant gains on the back of the prospects of artificial intelligence, the broader economic momentum began to drive an expansion in earnings expectations for the market as whole. This was surprising to analysts and economists, who at the beginning of the year were expecting equities to underperform, due to high recessionary pressures from tight monetary policy. The heavily followed recession indicators, such as the inverted yield curve and unemployment rate, proved to be unreliable. Central Banks launched a rate-cutting cycle in response to easing inflation, as anticipated, but the resilience of the U.S. economy came as a surprise.
The trend is poised to extend into 2025. The US economy remains robust. The consumer base is strong, private sector balance sheets are healthy, and while jobs per available worker have increased to a more normal level, fears of a spiral of increasing unemployment have not materialized. The pro-business stance of the new Trump administration, mixed with lower interest rates should benefit companies. However, along with economic growth comes a heightened probability of rising US inflation, which may show itself in the latter half of the year. The reflation will enhance corporate earnings, which will alleviate concerns about high valuations, but could also reduce or even reverse the Federal Reserve’s current rate-cutting initiative, which the market has already been pricing-in through higher long-term Treasury yields.
The current bull market is reaching its third year, which has historically shown to be weaker, marked by single-digit average gains and a higher percentage of declining stocks. The performance difference between stocks has also historically widened during this phase. From collecting data on recent stock-moving averages, we see this trend is starting to develop, along with widening valuations. This speaks to the value of active management for investing in the current environment.
Canada
In 2024, the Canadian market reached all-time highs, with a strong performance in the second half of the year. Earnings revisions turned positive mid-year, which also included a positive analyst consensus outlook into 2025. The TSX 60 performed in line with the TSX composite and mid/small caps, unlike the US, where there was a distinct outperformance of large caps. The late rally increased stock valuations to align with their historical averages. The Bank of Canada aggressively started cutting interest rates, with five rate cuts over the year, bringing the overnight rate down to 3.25%, surpassing US monetary policy easing. This was a relief for Canadian households, who are sensitive to rate changes due to shorter mortgage terms than the US. Meanwhile, the Canadian dollar fell to its lowest level in five years, from 83 cents US in May 2021 to 69 cents currently.
The Bank of Canada should continue easing monetary policy through 2025, with rates expected to settle between 2.25% to 2.5%, which is still higher than the post-Global Financial Crisis period (2009 – 2021). Assuming stable commodity prices, Canada’s growth profile should align with the US, with stock valuations increasing above historical averages and a normalized market, driven by fundamentals and rebounding earnings growth. This will provide potential for high single-digit or double-digit ranges by the end of 2025 and into 2026.
Looking at the risks, US president-elect Donald Trump’s proposed tariff policies, renegotiations of the US-Mexico-Canada trade pact, increased fiscal stimulus, and changes in immigration will impact Canada, potentially bringing increased inflation and lower GDP growth. The gap between US and Canadian policy rates is expected to widen, putting further pressure on the Canadian dollar.
Economically, Canada’s GDP growth in 2025 is officially forecasted by the Bank of Canada to be around 2%, but some analyst firms are predicting lower numbers. Vanguard is currently forecasting 1.7%, which is below the average growth trend of 2.1%. Lower interest rates will help, but lower immigration targets could offset these tailwinds. Canada’s real GDP per capita has also been declining due to low productivity, particularly in R&D. The federal government has stimulation tactics planned, like direct payments to Canadians in spring 2025 and a two-month GST holiday, which started in mid-December. We will see the impacts that these have.
Europe
Eurozone economic momentum weakened significantly over 2024. The manufacturing sector was particularly hard hit by high energy costs, damaging regulation, lack of export demand, and competition from government-subsidized Chinese firms. This was further compounded by political turmoil in France and Germany, where fiscal pressures and the rise of populist parties created a political divide. The economic weakness and a limited exposure to AI hindered European equities, resulting in the MSCI Europe ex-UK index comparatively subpar return of 8.1%.
UK equities marginally outperformed the Eurozone, with the UK FTSE All Share index returning 9.5%, as the economy recovered from its 2023 lows. This cyclical rebound was initially boosted by optimism following the election. However, the autumn budget, which included larger-than-expected tax increases, dampened some of the positivity. The increase in the national insurance tax on employment particularly hurt business sentiment, with surveys in the final months of the year indicating a decrease in hiring and rising prices. These factors left the Bank of England in a difficult position.
The Eurozone economy has barely experienced growth since 2023, facing a range of cyclical and structural challenges. For 2025, there is a potential for an upswing, as falling inflation and lower interest rates could help revive corporate investment spending and consumer confidence. Stronger real disposable income and easier financing conditions should encourage growth in consumption. However, potential US tariffs and their retaliation pose a downside risk, particularly for the auto sector. The forecasted negative impact on growth is around half a percentage point. Germany is particularly exposed to this risk and could face additional uncertainty from possible snap elections.
The census expectation is for the European Central Bank to cut rates quickly to 2%, followed by gradual easing to 1.5% by the end of 2025. More aggressive tariffs could provoke additional and accelerated easing, although the Central Bank will need to monitor any currency weakness against the dollar.
The UK out performance should extend into 2025. The Labour Party’s more expansive budget is likely already lifting economic growth, and the economy is more service-oriented, so it’s less exposed to the impact of tariffs. With a tight labour market, improving growth, sticky wages, and less restrictive fiscal policy, the Bank of England has room to reduce rates at a slower pace than the ECB.
Asia and Emerging Markets
Chinese economic activity was weak in 2024 due to falling property prices and low consumer confidence. Investors were unimpressed with the government stimulus over the first nine months of the year. More cohesive policy announcements in September were convincing enough, however, to create believe that the stimulus needed to restart the economy would be provided. As a result, Chinese equities rallied in the second half of the year, and the MSCI China Index ended the year with a strong 19.42% return. Meanwhile, continued optimism about the end of deflation, a weak yen, and ongoing corporate reforms helped Japan’s TOPIX index return a very strong 20.5%.
The Chinese policy pivot by the Politburo in late 2024 signals a decisive move to address issues that have depressed domestic demand, including the property sector, as well as have caused high local government debt, a lackluster equity market, and poor consumer confidence. The manufacturing sector is also steadily upgrading, particularly in new and emerging industries, which supports overall growth through rising capital expenditure and external demand. However, there are concerns about whether China can achieve the necessary growth levels if the US imposes their proposed tariffs. Also, so far domestic consumption has not significantly increased and there are likely limits to the stimulus the government will implement because they are remaining cautious not to ignite inflation. we could see a further extension to the recent positive momentum in Chinese equities into 2025 but with without an expectation of strong long-term growth, they will likely be muted.
Looking ahead to 2025 for Japan, sentiment and fundamental metrics are positive. The country remains on track for strong wage growth, and capital expenditure and shareholder returns are expected to increase steadily. However, a strong yen combined with higher interest rates could tamper earnings later in the year, especially in the consumer discretionary sector, where overseas sales outweigh domestic demand for carmakers and durable goods exporters.
Emerging markets outside of China show promising prospects. Indonesia is experiencing strong growth and earnings momentum, though the market remains vulnerable due to the dominance of banks and potential interest rate cuts. The ASEAN region stands to benefit from an emerging global trend of supply chain diversification and increasing foreign direct investment. India continues to show potential long-term. While there has been some profit taking after the recent rally, and extreme weather is disrupting agriculture, the overall potential remains intact. There continues to be advantageous demographics and significant investments in infrastructure and manufacturing.
Let’s take a closer look at fixed income, where we are and where we could be heading in 2025:
The first half of 2024 saw global broad-based dis-inflation, leading Central Banks to begin to reduce interest rates. We however saw this process play out in a bumpier fashion than expected. Outside of Europe, investors globally scaled back their initial rate cut expectations.
In Canada, the fixed-income market recovered from a poor October with slight gains in November, particularly in the long end of the yield curve. Corporate bonds outperformed government bonds. In the US, risk appetite was also evident as corporate securities outperformed US Treasuries. Duration hurt investment grade credit because of rising government bond yields. The High Yield market performed well because of strong equity performance, higher interest rates, and tightening credit spreads. The BofA/Merrill Lynch HY US and Euro indexes ended the year with a strong total return over 8%.
Internationally, UK Gilts were the worst performing sector due to their sensitivity to rising yields from long duration debt. Japanese bonds also underperformed as the Bank of Japan ended negative interest rates and yield curve control at its March meeting. Conversely, European bonds outperformed due to economic weakness, with the issue concentrated in Germany.
However, strong activity in Italy caused credit spread to tighten, leading Italian bonds to
be the best performing sector with returns of 5.3% over 2024, according to the Bloomberg Italian government bond benchmark index. The collapse of two French governments sparked investor concerns about French debt, widening French spreads by .30% relative to Germany, now wider than Spanish spreads for the first time since the global financial crisis.
A dominant theme for fixed income markets in 2025 will be the terminal rate for US interest rates. The market’s estimates have been wavering and often differing from the Federal Reserve’s official outlook. Potential new tariffs and an expected increase in the US fiscal deficit next year could push inflation higher leading the terminal rate to remain above the current market expectation of 3.5%. This will impact global Central Banks decisions materially in the coming year.
Overall, 2024 turned out to be better than expected. A few general themes seem likely to dominate the narrative going into 2025. First, with the uncertainty surrounding interest rates and the general positive economic sentiment, stocks should continue to be favoured, and bond positioning should remain defensive. Second, the focus on companies poised to benefit from AI advancements. American leadership in AI is strong, and big tech valuations, while stretched, have high potential to be supported by earnings as AI adoption continues. Third, healthcare advancement will be something to watch, as breakthroughs in drugs like Ozempic have the potential to change the dynamics of various other sectors, as they impact areas beyond healthcare, including hospital and gym usage. The global population aged over 65 is also expected to continue to expand, leading to increased healthcare spending as people invest more in maintaining their health. Lastly, political and international trade uncertainty will remain an undertone, with a likely notable increase to United states domestic production. In summation, the global outlook for earnings growth remains robust and market sentiment going into the new year is generally positive. However, with high US valuations and risks remaining under the surface, a disciplined approach will be key to capture returns in 2025.
Content sourced from Bloomberg, National Bank CIO office, JP Morgan, BofA/Merrill Lynch, MSCI, TOPIX, Fidelity Investments, BMO Capital Markets and Vanguard.
