Investment Newsletter: Reflecting & Seizing Opportunities

As we close the books on a whirlwind year, it’s clear that politics and macroeconomics can shift market sentiment rapidly. U.S. stocks finished 2024 on a high note, buoyed by strong corporate earnings, healthy labor markets, and rate cuts by the Federal Reserve. Yet, concerns around trade conflicts, persistent inflation, and geopolitical tensions tempered some of the enthusiasm in December.

Outside the U.S., Europe battled recession fears and political upheaval, while Japan and emerging markets experienced both tailwinds, like robust technology demand, and headwinds from tariff pressures.

In this newsletter, we’ll review the fourth quarter’s developments, then explore the opportunities and risks that lie ahead in 2025.

Executive Summary

Q4 2024 Highlights

- U.S. equities rallied post-election but faced headwinds in December amid inflation concerns and wage pressures.

- Europe grappled with recession fears and political instability; Japan maintained momentum thanks to a weaker yen and steady exports.

- Treasury yields rose on inflation and growth concerns; commodities and digital assets saw mixed performance.

2025 Outlook

- The U.S. economy remains robust, aided by ongoing AI innovation and possible pro-business “Trumponomics” policies.

- Despite elevated valuations and global uncertainties, equities could continue higher if investors maintain a balanced, long-term focus.

- Selectivity is key, as interest-rate paths remain uncertain and global macro factors—like potential tariffs—could disrupt markets.

Q4 2024 Market Recap

United States: Cautious Optimism

U.S. equities capped 2024 on a strong note, with the S&P 500 extending a multi-quarter rally fueled by solid corporate earnings and supportive monetary policy. Donald Trump’s re-election in November, coupled with a Republican “Red Sweep,” drove optimism around deregulation, tax cuts, and infrastructure spending. In particular, the communication services, technology, and consumer discretionary sectors led the gains, thanks to the “Magnificent Seven” mega-cap tech stocks.

However, the S&P 500’s year-end data revealed a stark divergence between these large-cap tech leaders and the broader market. Fewer than 30% of index constituents outperformed, under scoring the rally’s narrow concentration.

While equity participation remained narrow, monetary policy developments also shaped Q4 outcomes. The Federal Reserve delivered two 25 basis-point cuts (in November and December), bringing2024’s total rate reductions to 1.0%. Yet, persistently high inflation—core PCE rose 2.8% year-on-year in November—prompted Fed officials to signal fewer rate cuts ahead in 2025, sparking a mild December sell-off.

Despite the pullback, underlying economic indicators remained upbeat. Annualized GDP growth reached 3.1% in Q3, and non-farm payrolls rose steadily despite strike-related distortions.

Implications for Investors

- If you’re overweight in large-cap tech, you benefit from notable gains but be mindful of concentration risk should market leaders falter.

- Sectors tied to tax cuts or infrastructure (e.g., industrials, construction) may present new opportunities for diversification.

- Fewer future rate cuts mean less “easy money” for the markets. Growth-oriented investors may need to watch borrowing costs and overall liquidity levels.

- In a rising-yield environment, holding some short-duration bonds or laddered maturities might help manage interest-rate risks.

Bond Markets

Bond markets reacted swiftly to the Fed’s revised 2025 rate outlook. Investors priced in fewer cuts next year, pushing borrowing costs higher. Longer-term Treasury yields spiked, reflecting expectations for tighter financial conditions, while the two-year Treasury yield notched its sharpest rise in over two months. Though officials cut rates again in December, market participants braced for ongoing inflation pressures and a potentially more cautious Fed in 2025.

Implications for Investors

- Higher yields can make bonds more attractive, especially for those looking for income. You might consider adding duration gradually or focusing on corporate bonds if you want to capture higher spreads.

- Be aware of credit quality: if economic growth softens, lower-rated bonds could face higher default risks.

Beyond the U.S.

International markets played second fiddle in Q4. Europe struggled under recession fears and political discord, while the UK battled rising bond yields and weak domestic data. Japan ended 2024 on a high, driven by yen weakness and steady export demand, while emerging markets faced tariff-related uncertainties. China’s stimulus measures provided limited relief, leaving global markets generally lagging the U.S. as the year ended.

Implications for Investors

- If your portfolio contains global or international funds, short-term underperformance may mask future opportunities—especially in Japan or select emerging markets that could rebound if tariff tensions ease.

- Currency movements (e.g., yen weakness) can impact returns for U.S.-based investors. Consider currency-hedged products if you’re wary of fluctuations.

2025 Investment Outlook

Tailwinds for Equities

Looking ahead, the stage appears set for further equity gains in 2025. Robust labor markets, strong profit growth, and a business-friendly policy agenda in the U.S. could lift earnings. The ongoing rate-cut cycle by major central banks adds another catalyst, driving liquidity into risk assets.

Market participation has been broadening beyond technology. While advances in AI remain front-page news, other sectors—industrials, utilities, health care, and small caps—have quietly joined the rally. On the policy front, much of this optimism hinges on ‘Trumponomics,’ which could produce both opportunities and challenges across various sectors.

Implications for Investors

- Consider gradually rotating into sectors that could benefit from infrastructure bills or reshoring trends—like industrials and utilities—to diversify away from tech.

- If you’re already heavily weighted in tech, rebalancing might lock in some 2024 gains while positioning for broader market participation.

Trumponomics: Potential Winners and Laggards

On the positive side, expected beneficiaries include deregulated financials (banks), energy and commodities (oil, gas, steel, coal), onshoring-related industrials, defense contractors, managed health care, and even cryptocurrencies.

Conversely, tariff-exposed consumer and industrial companies, renewable energy firms, and labor-intensive businesses at risk from wage inflation may face new pressures.

Implications for Investors

- If you hold a diversified U.S. equity portfolio, watch for potential upside in banks and industrials if regulation continues to ease.

- Renewable energy investments might face policy hurdles, so allocate with caution if you’re overexposed to this space.

Federal Reserve: More Rate Cuts on the Horizon?

The Federal Reserve signaled fewer cuts ahead in 2025, projecting only two additional reductions next year rather than the four previously anticipated. Chair Jerome Powell emphasized a cautious “new phase” in monetary policy as inflation persists and the economy remains resilient. Markets reacted sharply, with stocks falling and Treasury yields rising after the Fed’s revised forecast.

While officials remain optimistic about steady growth, they’re wary of reigniting inflation and remain on alert for potential risks, including proposed tariffs and immigration policies under the incoming Trump administration.

Implications for Investors

- A slower pace of cuts may keep borrowing costs slightly elevated, affecting housing and consumer spending. If your portfolio is consumer-focused, watch for potential earnings softness in discretionary sectors.

- Holding short-term bonds can help mitigate interest rate volatility while still participating in higher yields.

The AI Opportunity (and Hype)

AI investment remains a key driver of long-term growth, although some near-term pullbacks may occur as hype outpaces practical deployment. Industry giants such as Amazon, Alphabet, Meta, and Microsoft are set to invest roughly $500 billion over the next three years, racing to dominate the AI “stack”—from semiconductors to end-user applications.

However, expansion requires old-economy resources like copper, power, and industrial equipment, creating opportunities in utilities, industrials, and mining. Since AI has the potential to disrupt a wide variety of tasks performed by humans, the total addressable market is vast and yet to be fully understood. However, preliminary research calculates a multi-trillion-dollar potential.

Beyond AI, another noteworthy development in late 2024 was the market’s expanded leadership, stretching well beyond mega-cap tech.

Implications for Investors

- If you’re heavily weighted in major AI leaders, be mindful of valuation risk. Over-concentration can heighten volatility.

- Diversify by looking at “picks and shovels” plays—utilities, industrial manufacturers, or mining stocks that provide the underpinnings for AI data centers.

Broader Market Participation

Market leadership has recently expanded beyond mega-cap tech to include small caps, dividend payers, and value stocks. Ongoing tailwinds—Federal Reserve easing, a push for domestic manufacturing, and rising defense spending—should continue attracting capital to these “forgotten” corners of the market.

This broadening suggests that investors might benefit from looking beyond traditional growth darlings.

Implications for Investors

- If your portfolio has relied heavily on large-cap tech, explore small-cap or value-oriented funds to capture potential upside from a broader rally.

- Dividend-paying stocks might also offer a boost against volatility, particularly in sectors tied to onshoring or steady consumer demand.

Opportunities in Undervalued Equities?

The market’s long-standing tilt toward large U.S. technology names began to wane in the second half of 2024, making room for dividend-paying, value-oriented stocks and small-caps to shine.

Investors looking ahead to President-elect Donald Trump’s policy proposals — including regulatory rollbacks for banks, energy, and health care, plus increased defense spending — anticipate stronger free cash flows for a variety of dividend payers. At the same time, historically low valuations among small-cap stocks offer an intriguing upside; these companies have outperformed larger peers in roughly 70% of rolling three-year periods since 2000.

Factors such as shifting manufacturing onshore, rising AI data center construction, and robust demand for infrastructure systems could further invigorate small-caps, especially in sectors like utilities, pharmaceuticals, and select defense firms. Combined with a supportive business climate, these developments suggest that undervalued equities may be poised for a meaningful rebound in 2025 and beyond.

Implications for Investors

- Small-cap companies may have higher growth potential if America’s reshoring efforts and AI data center construction ramp up.

- If you already have a balanced portfolio, selectively adding undervalued small caps could diversify returns without vastly increasing risk.

Is it Time to Invest in International Markets?

Looking outside the U.S., we see a different story unfolding between Indian and Chinese equities. Indian equities have far outpaced Chinese stocks over the past five years, and their valuations reflect that divergence. India’s youthful population and soaring smartphone penetration have boosted telecom names like Bharti Airtel, though lofty valuations demand selectivity.

Meanwhile, China’s digital economy also has promising players, although it faces unique challenges. Companies such as Tencent and NetEase could benefit from government stimulus and a vast consumer base, yet U.S.-China frictions remain a concern. Meanwhile, Taiwan Semiconductor, Samsung, and SK Hynix are racing to meet AI-fueled chip demand, while supply chain realignment is opening doors in Brazil, Mexico, and Indonesia.

Historically, international markets are plagued by political, monetary, and economic uncertainty. Furthermore, the rise in power of the BRICS alliance could challenge U.S. power in emerging markets, although Trump’s presidency could reaffirm U.S. leadership on the global stage. Very moderate exposure to international equities can bring reasonable diversification to portfolios.

Despite these various opportunities, investors must also weigh significant macro and geopolitical uncertainties, leading us to our broader discussion on balancing risks and opportunities.

Implications for Investors

- Global exposure can offer diversification, but pick your spots wisely, particularly in emerging markets or foreign tech.

- Currency-hedged ETFs or actively managed funds may help mitigate risks.

Balancing Risks & Opportunities

Although the outlook for 2025 is encouraging, potential headwinds linger. Trade conflicts, especially if new tariffs reignite inflation, could disrupt global supply chains. Europe’s and China’s sluggish economic prospects weigh on multinational earnings, while ongoing conflicts in Ukraine and the Middle East introduce geopolitical uncertainty. Elevated valuations across many equity segments mean that short-term corrections are possible.

Nevertheless, trends such as the AI revolution, the reshoring of manufacturing, and a nascent capital spending super-cycle in both the U.S. and abroad support a positive long-term picture. Many industrial giants in Europe, for instance, generate most of their revenue outside their home markets, broadening the investable opportunity set. The key is selectivity and diversification—pairing high-growth plays like AI with dividend payers, small caps, or industrials that can benefit from stable or rising consumption.

Implications for Investors

- Assess whether you have too much exposure to any single region (e.g., over-reliance on U.S. tech) or sector.

- A mix of domestic and international holdings can hedge geopolitical or regional risks.

- Evaluate valuations carefully when layering new positions into your portfolio.

Key Takeaways and Actionable Steps

As 2025 unfolds, investors can lean into market tailwinds while maintaining a balanced approach. Staying informed of policy changes, especially around tariffs and immigration, will be vital. Equally important is discerning which companies can execute successfully—whether they operate in leading-edge AI or more traditional, undervalued industries:

1. Stay focused on the long term: Headlines might spark short-term volatility, but consistent strategy wins over reactionary moves.

2. Rebalance when appropriate: Keep allocations in line with risk tolerance, shifting market dynamics, and tactical opportunities. This is particularly true if you’ve seen outsized gains in a concentrated sector.

3. Diversify across sectors, market caps, and geographies: U.S. investors can benefit from a mix of domestic core holdings, small caps, and selective international exposure for risk mitigation.

4. Monitor valuations and fundamentals: Whether it’s AI leaders or small-cap industrials, avoid overpaying for hype-driven stories. Look for sustainable business models with strong cash flows.

As always, our team is here to help you navigate evolving markets in 2025 and beyond. The good news is our team does steps one through four in partnership with you on a regular basis.

Reach out to schedule a review or learn more about strategy adjustments that may align with your goals and risk profile.

We wish each of you a happy, healthy, prosperous, and safe 2025! Thank you for you continued trust in us!

Talk soon,

The Wela Financial Advisory Team

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_{Brent Forrest & Associates, LLC. dba Wela Financial Advisory (Wela) is a registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.}