In Short

• Despite challenges including a global election super-cycle, stickier inflation, fewer-than-expected rate cuts and geopolitical uncertainty, the S&P 500 finished 2024 up 25%, notching back-to-back 20%+ years for the first time since 1998
• Mega-cap technology stocks continued to post outsized gains in 2024, with the top 10 S&P 500 stocks returning ~48% during the year
• We believe fundamentals will remain solid in 2025, with expectations of strong economic growth (+2.2% for U.S., +3.2% for global GDP) and earnings growth (~15% for the S&P 500).
• In light of 2024 returns, now may be a prudent time to review long-term asset allocations to identify any opportunities for portfolio rebalancing or as part of a general reassessment of investment goals and objectives

A Fresh Start

In many ways, a new year offers a clean slate, allowing investors the opportunity to pause and reflect on the past and to perhaps set a new course for the future. Although investors faced various challenges in 2024, including a global election super-cycle, ongoing geopolitical tensions and stickier-than-expected inflation, financial conditions held relatively steady with the S&P 500 Index closing out the year with a 25% gain, notching back-to-back 20%+ years for the first time since 1998.

Expectations for 2024 were admittedly different from what transpired. Coming into the year, U.S. economic growth was estimated at ~1.2% but could end up as high as +2.7% based on the current thinking. In terms of monetary policy, the market originally anticipated six 25bps cuts in 2024, resulting in a policy rate of 3.75 – 4.00% by the end of the year. However, the Federal Reserve went ahead with only three cuts, for a total of 100bps—with half of that coming in September—leaving the policy rate in a range of 4.25 – 4.50%. As it stands, fixed income markets are anticipating that a cautious Fed will hold rates steady at its January meeting, and, after a pause, follow up with only two to three total cuts in 2025. Clearly, the U.S. economy has continued to defy expectations (or gravity) by delivering what is often cited as a Goldilocks scenario—a resilient labor market and robust consumer spending despite above-target inflation and higher-than-neutral Fed policy rates.

A prevalent theme in 2023 was the strength of S&P 500 mega-cap technology stocks when compared to the rest of the index. While the expectation for 2024 was to see more of a broadening of equity results, the top 10 stocks in the index still delivered excess return when compared to the rest of the index, as artificial intelligence remained a persistent tailwind. The top 10 stocks posted a 48% return in 2024 (compared to 73% in 2023), which led to a further increase in index concentration; the top 10 represented 38% of the index as of the end of the year versus 32% a year earlier. These stocks outperformed the index meaningfully in December, returning over 5% while the S&P 500 was down 2.4%.

Despite hopes for a “Santa Claus rally”—a potential rise in stocks over the last five trading days in December and the first two trading days in January—the index saw a sell-off on every business day between Christmas and New Year’s, driving weak December performance. The primary culprit for the swoon in sentiment was the Fed’s more hawkish projection for rate cuts in 2025. Domestic small-cap stocks, which tend to be more interest-rate sensitive than large caps, felt the biggest sting, as the Russell 2000 index dropped 8% for its largest monthly decline since June 2022 and its worst December return since 2018. Treasury yields climbed throughout the month, with the 10-year yield moving from a low of 4.15% to upward of 4.6%. The U.S. dollar also had a strong month, climbing higher for the quarter (+7.6%) primarily driven by weakness in other major economies, such as the eurozone.

Looking ahead to 2025, we believe that fundamentals should remain solid. Current expectations are for another strong year of economic growth, as the IMF estimates real GDP growth of +2.2% for the U.S. and +3.2% globally. Emerging market and developing economies are expected to grow the most, at a rate of +4.2%. In the U.S., while it is still unclear how the Trump administration’s policies will affect markets, an “America First” stance with corporate tax cuts, deregulation and (depending on their scope) proposed higher trade tariffs, could create tailwinds, especially for domestic small-cap stocks.

Drilling down, S&P 500 companies are expected to see ~12% earnings growth in Q1 and ~15% growth for the full year. For reference, the index is on track for earnings growth of +11.9% (the highest level of year-over-year earnings growth in three years) for 4Q 2024 and +9.5% for all of 2024. In addition, the Russell 2000 Index is anticipated to grow earnings at a much faster pace of +60% following a likely negative growth rate in 2024 (currently on track for -4.5%).

While there should be potential for tactical opportunities in the new year, we believe this is also a prudent time to review your long-term asset allocation (the mix of stocks, bonds, and alternatives in your portfolio) to identify any opportunities for rebalancing or as part of a general reassessment of your investment goals and objectives. Some relevant factors to consider include short- to medium-term liquidity needs, shifts in risk tolerance, potential portfolio drift (especially after two years of strong equity returns), and whether there are new opportunities to make investments that are more in line with your long-term goals.

Portfolio Implications

Equities were broadly lower in December, although mega-cap technology stocks helped to keep large-cap growth stocks above water. Domestic small-cap stocks struggled the most, nearly wiping out gains from earlier in the quarter. We maintain an at-target overall view across equities with an overweight to small and midcaps as we continue to anticipate further broadening of equity market performance. Renewed stimulus from China has improved the outlook for non-U.S. markets, but we anticipate that structural challenges there will continue to weigh on the global economy. Within equities, we favor lower-beta, higher-quality names. In this more challenging environment, we also favor employing active management to select companies with high earnings visibility.

Fixed Income was broadly lower as yields rose, led by the longer end of the yield curve. We are more constructive on investment grade fixed income as yields are generally close to fair value, with shorter-dated bonds in particular presenting little downside risk, in our opinion. We are a bit less constructive in the near term on emerging markets debt given strong dollar momentum and stretched valuations. High yield spreads, in our opinion, remain tighter than fundamentals warrant. Overall, our soft-landing outlook and debt sustainability concerns make us cautious on longer-dated bonds, even if policy rates are cut in the latter half of the year.

In a challenged fundraising, exit and financing environment, we continue to believe significant opportunities exist within Private Markets for firms and strategies that can act as liquidity and solutions providers to help close the capital supply/demand gap and support value-added transactions. Given this backdrop, Neuberger Berman’s deep relationships and unique position within the private equity ecosystem have translated into record levels of deal flow across our platform. We continue to see potentially compelling opportunities across secondaries, co-investments, private credit and capital solutions. We are cautious on core private real estate, but this is offset by what we see as abundant market-dislocation opportunities in the value-add and opportunistic sectors and particularly in real estate secondaries.

Index Returns as of November 2024

Source: Bloomberg, total returns as of December 31, 2024. S&P 500 Index is represented by S&P 500 Total Return Index. Nasdaq Composite NASDAQ-Composite Total Return Index. Dow Jones is represented by Dow Jones Industrial Average TR. Large Cap is represented by Russell 1000 Total Return Index. Mid Cap is represented by Russell Midcap Index Total Return. Small Cap is represented by Russell 2000 Total Return Index. All Cap is represented by Russell 3000 Total Return Index. Large Cap Growth is represented by Russell 1000 Growth Total Return. Large Cap Value is represented by Russell 1000 Value Index Total Return. Small Cap Growth is represented by Russell 2000 Growth Total Return. Small Cap Value is represented by Russell 2000 Value Total Return. ACWI is represented by MSCI ACWI Net Total Return USD Index. ACWI ex US is represented by MSCI ACWI ex USA Net Total Return USD Index. DM Non-U.S. Equities is represented by MSCI Daily TR Gross EAFE USD. EM Equities is represented by MSCI Daily TR Gross EM USD. Cash is represented by ICE BofA US 3-Month Treasury Bill Index. U.S. Aggregate is represented by Bloomberg US Agg Total Return Value Unhedged USD. Munis is represented by Bloomberg Municipal Bond Index Total Return Index Value Unhedged USD. Munis Short Duration is represented by Bloomberg Municipal Bond: Muni Short (1-5) Total Return Unhedged USD. Munis Intermediate Duration is represented by Bloomberg Municipal Bond: Muni Intermediate (5-10) TR Unhedged USD. Investment Grade is represented by Bloomberg US Corporate Total Return Value Unhedged USD. High Yield is represented by Bloomberg US High Yield BB/B 2% Issuer Cap Total Return Index Value Unhedged USD. Short Duration is represented by Bloomberg US Agg 1-3 Year Total Return Value Unhedged USD. Long Duration is represented by Bloomberg US Agg 10+ Year Total Return Value Unhedged USD. Global Aggregate is represented by Bloomberg Global-Aggregate Total Return Index Value Unhedged USD. EMD Corporates is represented by J.P. Morgan Corporate EMBI Diversified Composite Index Level. EMD Sovereigns – USD is represented by J.P. Morgan EMBI Global Diversified Composite. Commodities is represented by Bloomberg Commodity Index Total Return. Commodities ex Energy is represented by Bloomberg Ex-Energy Subindex Total Return. U.S. 10-Year Yield is represented by US Generic Govt 10 Yr.