January 09, 2025

Markets overview

2024 was a good year for markets. The biggest winners were the “Magnificent 7”, comprised of the largest companies in the world, which benefitted from the advancement in Artificial Intelligence (AI). Indeed, anything AI-related had a stellar year, regardless of company size, location and sector. The US large-cap market, which has the most exposure to AI, outperformed the rest. Even so, Canadian equities, small caps, emerging markets and developed international stocks all had a banner year.

Markets also benefited from a favourable backdrop. In 2024, economic growth surprised to the upside. At the same time the labour market remained strong, inflation moved lower and central banks cut interest rates. Add to that a US President-elect who is seen as being more pro-business than his predecessor, and this combination of factors led to both strong equity earnings and higher valuations. 

While equities overall moved higher in 2024, there were a number of notable pullbacks, many related to the future path of central bank policy. The most recent pullback in markets occurred when US policymakers lowered the expected number of rate cuts they foresee in 2025 and extended the time period they believe is necessary to bring inflation back to target. Higher rates and bond yields are seen as a headwind for equities.

The direction of travel for interest rates also affects bonds. The FTSE Canada Bond Index was up 4.2% in 2024, which is its approximate average yield. What is notable is the volatility in traditional bond yields and returns as the market prices in shifting economic expectations. Credit investors earned a solid premium over traditional bonds in 2024, and having an allocation to credit reduced portfolio volatility, which is uncommon.

Portfolio strategy

We start 2025 on a strong footing. The global economy is showing signs of resilient growth and central bank easing is likely to continue in many parts of the world. In this environment, the labour market has remained solid and consumers are spending. Company profits are also growing, and this may continue to drive equity markets higher. We expect returns to be more muted than those of the last two years, mainly because it’s harder to get higher valuations after two years of significant expansion. While parts of the US equity market are particularly expensive, this may be justified given their continued strong earnings.

Within equities, we are well diversified across geography, style and size. This hasn’t always paid off recently because so much of the market’s return has come from the Magnificent 7 and AI-related companies. That being said, we are positioned for continued strength in AI stocks while maintaining exposure to other areas of the market which will offer good value when the rally inevitably broadens.

We increased portfolio exposure to credit in 2024 and continue to believe there is a strong case for continued outperformance of this asset class relative to traditional bonds in this economic environment. We remain confident in our alternative strategies, both in public and private markets. While there have been disruptions in parts of the real estate market, we are looking to private loans as well as other opportunities that exist outside of stocks and bonds. We believe that returns in many areas of private markets are improving, and will likely continue to do so, with a lower level
of volatility.

While we are feeling positive about market prospects for 2025, we also see some notable uncertainties related to the potential for inflationary policies, continued high levels of fiscal spending, and ongoing geopolitical uncertainty. These are all risks we will be watching as we manage portfolios through the inevitable market twists and turns in the year ahead.

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This post is for information only and is not intended as investment advice. The views expressed are those of the author at the time of publication and are subject to change at any time.

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