2025 Outlook with Graystone Consulting | DJCF

Summary

In this presentation, Robert Morris and Paul Cox discuss the current market conditions and investment strategies for 2024. They highlight the strong performance of the tech sector last year, driven by valuation increases rather than earnings growth, and address concerns about persistent inflation and its impact on the economy. With modest earnings growth expected this year, the speakers recommend focusing on diversified equity allocations, including small and mid-cap stocks, as well as investment-grade bonds. They also outline the streamlined investment pools and the role of the investment committee in ensuring long-term financial stability.

Takeaways

• 😀 The presentation discusses current market conditions and outlook for the remainder of the year, focusing on recent volatility and trends.
• 😀 Last year's strong market performance was driven by the tech sector, particularly the 'Magnificent 7' companies, but growth is expected to normalize in 2024.
• 😀 Small caps and international markets have shown more typical returns compared to large tech stocks, which saw inflated valuations.
• 😀 The earnings growth of large tech companies like Nvidia and Microsoft is expected to slow down as valuations correct.
• 😀 Inflation remains a critical factor, with the Federal Reserve working to manage it, although the 2% target is still a challenge with inflation holding steady at 2.8%.
• 😀 The bond market will likely remain stable, with fewer rate cuts expected from the Federal Reserve due to persistent inflation pressures.
• 😀 Wage growth remains positive, but layoffs are being seen in certain sectors, and the labor market is showing early signs of a slowdown.
• 😀 Consumer debt is rising, and while consumers are still spending, it's happening more cautiously, which may affect market performance.
• 😀 The projected earnings growth for 2024 is expected to be around 13%, with no significant increases in stock valuations compared to last year.
• 😀 The investment strategy includes a focus on investment-grade bonds, equities, and inflation-sensitive sectors, particularly infrastructure.
• 😀 The investment pools have been streamlined to help investors understand their portfolio allocations and risk tolerance, with options for both active and passive strategies.

Q & A

What was the primary driver of strong returns in the market last year?

The primary driver of strong returns last year was the technology sector, particularly the performance of large tech stocks, which led to a 36.6% return in 2024. This was significantly higher than the historical average, which is around 18% since 1990.

Why were small caps considered to have an ordinary year last year?

Small caps had an ordinary year because, in classic theory, small-cap stocks tend to earn more than large-cap stocks over time, but last year they performed in line with expectations, unlike large tech stocks that saw outsized gains.

How did valuation increases contribute to the returns of the past two years?

Valuation increases accounted for about 19.8% of the total return over the past two years, meaning more money was flowing into stocks, particularly the 'Magnificent 7' tech companies, driving up their valuations significantly.

What is the outlook for the 'Magnificent 7' tech companies going forward?

While the 'Magnificent 7' companies, including Nvidia and Microsoft, are expected to continue operating successfully, their growth rates are likely to slow down or normalize, as their valuations were pushed up excessively in the past.

How does the current market self-correct the imbalance seen in tech stocks last year?

The market is self-correcting by pulling back some of the excessive growth in tech stocks, particularly those that were overvalued. For example, Tesla's high price-to-earnings ratio has led to a drawdown, while the rest of the market has remained more stable.

Why is inflation still a significant concern for the market?

Inflation remains a concern because it has not decreased to the Federal Reserve's target of 2%. Despite some signs of improvement, inflation is still stubbornly high, leading to fewer rate cuts from the Federal Reserve, which has an impact on investment returns.

What impact does consumer debt have on the market outlook?

Rising consumer debt, coupled with low savings rates, presents a risk for the economy. If there's an economic shock, the lack of financial buffers could lead to significant market volatility. However, consumers are still spending, albeit cautiously.

What are the expectations for earnings growth in 2024?

Earnings growth in 2024 is expected to be modest, around 13%, with no major surprises or above-average growth. There are no significant expectations for valuation increases either, which means market returns are expected to remain relatively flat in the near term.

What is the investment outlook for the balance of this year?

The investment outlook suggests a moderate return for the year, with equities likely to perform well in high single digits. However, the market will remain volatile due to political changes and news events. Investment-grade bonds are also considered a good option for stability.

How is the investment portfolio structured to navigate current market conditions?

The investment portfolio is structured to minimize risk by diversifying away from the overvalued 'Magnificent 7' stocks and focusing on small and mid-cap companies, as well as international markets. The allocation is designed to provide steady returns while navigating volatility.