Economy
December 2024 saw the U.S. economy wrap up a solid year that defied the skeptics who had been calling for a recession since 2023. Key economic indicators reflected a steadily expanding, disinflationary economy with some pockets of weakness. The Bureau of Economic Analysis reported a real GDP growth rate of 2.8% for Q3 2024, a slight deceleration from the 3.0% observed in Q2. Inflation metrics continued to move towards the Fed’s 2% target, as the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) Price Index remained anchored in the mid to high 2% range, suggesting moderate price increases. The unemployment rate persisted in the low 4% range, indicative of a relatively stable labor market that added an average of around 200,000 jobs per month over the last year. However, sectors sensitive to interest rates, notably housing and automotive industries, continued to experience challenges, reflecting the cumulative impact of the Fed’s monetary tightening over the past few years.
Speaking of the Federal Reserve, it met market expectations and implemented a 25 basis point reduction in the federal funds rate, adjusting the target range to 4.25%–4.5%, marking the third consecutive rate cut. However, in its forecast, the Fed signaled a more measured approach to rate adjustments in 2025, indicating a potential deceleration in monetary easing. Geopolitical dynamics also continued to exert influence over economic conditions, with persistent trade tensions between the U.S. and China contributing to an uncertain trade environment.
Looking towards 2025, Wall Street consensus projections suggest another year of trend-like growth in a moderating price environment. Consensus estimates forecast GDP growth between 2.0% and 2.5%, signaling a modest slowdown from 2024 yet maintaining a path of steady expansion. Inflation is expected to remain subdued, with CPI and Core PCE indices expected to stabilize within the 2.1% to 2.4% range by year-end. The unemployment rate is forecast to experience a marginal uptick, potentially reaching 4.2%, reflecting a cooling labor market. Consumer spending should continue its current growth rate, with estimates suggesting an increase of approximately 2% throughout 2025, supported by rising incomes and manageable debt levels. Business investment, particularly in equipment and software, is expected to grow by 4.7%, aligning with 2024’s performance and driven by technological advancements and capital expenditure initiatives.
Overall, we find the current economic environment supportive of equities and slightly less so for bonds. Our outlook is highly dependent on the policy actions of the new administration and the Fed’s view of inflation risks and how that impacts monetary policy.
Markets
U.S. equity markets delivered another exceptional performance in 2024, notwithstanding a modest December pullback. With 57 record-setting closing highs, the S&P 500 concluded the year with a 25% gain, marking the most robust two-year streak since 1998. The S&P 500 Top 50 outshone broader indices, surging 34% due to the strength of mega-cap companies, robust economic expansion, and optimism surrounding artificial intelligence. While mid- and small-cap equities benefited from a broadening rally, particularly following the Presidential election, their momentum waned in December amid inflationary concerns and fewer-than-expected Federal Reserve rate cuts. For the year, the S&P MidCap 400 and S&P SmallCap 600 posted respectable gains of 14% and 9%, though they lagged behind their large-cap counterparts. International markets underperformed, constrained by geopolitical tensions, tariff uncertainties, sluggish European growth, and weakening commodity prices, which capped gains to single digits across most regions.
As we transition into 2025, the equity markets appear well-positioned to capitalize on strong economic fundamentals, including an anticipated 2.5 % GDP growth, record corporate profits expected to rise 14%, and sustained net profit margins near a historic 12%. Earnings growth is forecast to extend beyond technology’s 21%, with health care, industrials, and materials projected to deliver gains of 20%, 19%, and 18%, respectively. However, significant headwinds persist. The Federal Reserve’s inflation-focused stance, elevated tariffs under the Trump administration, potential stagnation in AI-driven valuations, and rising bond yields—recently at 4.63%—pose risks. It is certainly possible that yields exceeding 4.75% could prompt a market correction, while a breach above 5% may challenge the bull market.
Despite these risks, technology remains the dominant growth engine, driven by AI’s transformative potential. The Magnificent Seven—a group of megacap tech giants—has consistently outperformed the broader market, with 2024 earnings expected to rise by 33%, compared to 4% for the remaining 493 S&P 500 stocks. However, the pace of growth for these giants is slowing, while earnings for the broader market are anticipated to accelerate in late 2025, raising hopes for sector rotation. We remain skeptical of this ‘great rotation,’ at least in the first half of the year. Earnings growth among non-tech stocks, while improving, pales in comparison to the dominant tech giants, whose profitability remains enviable even with moderating growth rates. While a shift away from megacap tech in 2025 remains a possibility, the enduring allure of their earnings growth and the resilience of the AI narrative suggests investors may remain anchored to the Mag 7 unless the Federal Reserve becomes less hawkish and/or the Congress extends existing corporate tax rates. As a result, we remain overweight U.S. stocks in general and large-cap growth stocks in particular as we move into what will likely be a volatile first half of the year.
The Retirement Consumption Puzzle
An article in the Wall Street Journal this past week has me reflecting on over 25 years of financial planning and how it relates to investing planning and asset allocation. Long-term financial and retirement success has a lot to do with expense management as it relates to your family’s investment portfolio. This is the retirement consumption puzzle.
Throughout these years, I have learned that there are many ways to understand spending levels through financial planning. When I started, it was about the 4% Rule – you can spend four percent of your liquid assets per year. I also learned that maybe you can reverse engineer a portfolio so that the portfolio produces enough income (tax-exempt interest/dividends plus retirement income from IRAs) to offset one’s annual expenses. I also have practiced the idea that each goal (e.g., income, college education, retirement) is a different bucket and has a different investment allocation due to the need for the money.
While the 4% Rule is important, I have learned that it is just one metric to consider. For example, if one’s annual consumption is greater than 4%, flashing red lights appear to the financial planners. Monte Carlo simulations confirm this. You have two options: (1) decrease annual expenses or (2) increase the allocation to equities in order to meet your annual expense needs. This second option could cause the portfolio to take on more risk and stress your portfolio in down market years like 2022.
Alternatively, the results of financial planning can show that your spending levels are good and that you should start gifting to your family and charity. This then gives us the option of tactically and thoughtfully increasing investment risk. Monte Carlo simulations can confirm that you will have assets to pass to your heirs.
What have I concluded in this quarter century? Each family’s retirement consumption puzzle is unique but comes down to one’s annual expenses as a percentage of the liquid assets and the asset allocation that you are comfortable with so that you can enjoy and lead the life you want to lead.
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Performance may be compared to several indices. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. A complete list of Robertson Stephens Investment Office recommendations over the previous 12 months is available upon request. Past performance does not guarantee future results. Forward-looking performance objectives, targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are speculative and involve substantial risks including significant loss of principal, high illiquidity, long time horizons, uneven growth rates, high fees, onerous tax consequences, limited transparency and limited regulation. Alternative investments are not suitable for all investors and are only available to qualified investors. Please refer to the private placement memorandum for a complete listing and description of terms and risks. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2025 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.