Happy New Year! As we step into 2025, we take a moment to look back at what happened in the investment world during 2024.
I share nine interesting charts that tell the story of an extraordinary year in financial markets and some insights for the period ahead.
A standout theme from last year was the incredible outperformance of the US technology sector, particularly the "Magnificent Seven". But the big question remains: can this extraordinary run continue?
Looking Backwards
2024 was another outstanding year for global stocks, with overall gains of 20%, according to the MSCI World Index.
The chart below shows how the major regional stock markets performed in Sterling terms.
Chart 1: Stock market performance by region
As you can see, US stocks outshone (again) - the benchmark S&P 500 index surged by an impressive 27%.
US Outperformance: A Persistent Trend
This continues a decade-long trend whereby US stocks have consistently outperformed their international counterparts.
The "quilt chart" below shows how US stocks, divided into large, medium, and small companies (or large caps, mid caps, and small caps), have performed each year compared to other regions and asset classes. It also includes the average annual return for each group over the past decade up to the end of 2024.
Chart 2: A golden decade for US stocks
For example, US large caps (principally the US tech behemoths) have achieved annualised returns of 13%. In contrast, international stocks have delivered ‘just’ 5%.
This incredible performance was led by the "Magnificent Seven" (again) – a group of big US tech companies: Apple, Microsoft, Nvidia, Amazon, Alphabet (Google), Meta, and Tesla. Together, these companies delivered an average return of 48% over the year,
The next chart below shows how the average returns of the seven tech giants compare to the overall performance of the S&P 500 (measured in USD). It also highlights how much lower the S&P 500’s results would have been without their contribution; removing these 7 stocks would have cut the S&P 500 returns to only 10%.
Chart 3: Mag 7 vs S&P 500
These latest gains reflect a number of elements: the growing excitement around artificial intelligence (AI), robust earnings, and significant asset flows into index-tracking ‘passive’ funds.
Remarkably, these seven tech giants now comprise over one-third of the US stock market (based on the S&P 500) and nearly 20% of the global stock market (MSCI World). Their market share has grown significantly in recent years, doubling since the start of the COVID-19 pandemic.
For reference, the entire UK’s stock market makes up 3.4%.
S&P 500 Concentration
This incredible performance by a small number of companies, combined with the virtuous circle effect of passive investing (as money flows into markets, a significant portion goes to the S&P 500, so the largest index stocks see the biggest purchasing pressure, pushing their prices ever higher), has led to an S&P 500 Index that is now more concentrated that at any point in the last 50 years.
Many are already beginning to question the index’s usefulness as a barometer of the US economy or as a diversified exposure to US equity markets.
Chart 4: S&P 500 Concentration
Exceptional Returns, Minimal Volatility
2024 stood out for two reasons: investors saw impressive gains and the ride was unusually smooth.
Even in good years, the stock market typically experiences at least one dip during the year. For example, looking at the S&P 500 since 1980, the average yearly return has been about 12%. However, in most years, the market also sees a drop at some point, with an average decline from its highest to lowest point of around 14%.
2024 was different. US stocks gained an impressive 23% (in USD), while the largest drop during the year was only 8%. This means the market achieved top-tier performance with low volatility.
The chart below shows this pattern, comparing the S&P 500’s yearly performance with its biggest drop during the year.
Chart 5: S&P calendar returns vs intra-year declines
A Good Year for Bitcoin (and Gold)
It would be remiss not to mention Bitcoin, which had a remarkable year in 2024, skyrocketing past $100,000 for the first time. Bitcoin has gradually gained institutional adoption in some areas, with a key development in 2024 being SEC approval for the launch of several Bitcoin ETFs, the most popular of which is managed by BlackRock. This made investing in Bitcoin more accessible while addressing concerns around secure storage.
Its momentum picked up further after Donald Trump’s election victory, as he publicly expressed support for the ‘Bitcoin bros’ and stated that he would implement a Strategic Bitcoin Reserve for the US government
It’s important to note that Bitcoin ETFs are not widely available in the UK, and the FCA does not regulate Bitcoin itself.
Chart 6: Bitcoin and gold surged in 2024
Looking Forwards
And so, on to 2025 (and beyond).
The key question is whether US stocks, specifically the Magnificent Seven, can sustain their recent outperformance. Opinions are more divided than ever.
Some argue that diversification is no longer necessary (I.e. why look beyond US stocks) and that this time could well be different:
- The US tech giants are generally regarded as the best companies in the world and seem to get stronger by the year.
- They’re not ‘one trick ponies’ benefiting from diversified business lines.
- They are also investing heavily in future innovation, which puts them very much on the front line for the potential AI productivity boom.
Others take a more cautious stance, warning that the US might be over-concentrated and overvalued.
We avoid making bold predictions about short-term market returns. Forecasting stock market movements—whether direction or size—is notoriously unreliable.
The chart below underscores this point, showing the consistent gap between analysts' forecasts and the S&P 500's actual performance.
Chart 7: Analyst forecasts vs actual returns for the S&P 500
That said, we’d advise against putting all your focus on US stocks.
It’s easy to fall into the trap of "recency bias," where people assume the strong performance of the past decade will continue indefinitely without fully considering past trends or potential future risks.
The charts below highlight why a more balanced approach might be wiser.
Balance is Key
US stocks are currently valued at 22 times their expected earnings, a common measure of how expensive or cheap a market is. This is 32% higher than their long-term average.
Meanwhile, European and emerging market stocks are trading at significantly lower valuations, approaching record discounts compared to the US.
Chart 8: Global PE ratios (a proxy for relative valuation)
The rising dominance of the "Magnificent Seven" US tech giants played a major role in pushing valuations higher in 2024. Uncertainty around new tariffs following Donald Trump’s election win also weighed on international markets, further widening the valuation gap.
Some argue that US stocks deserve higher prices due to their strong focus on technology and robust earnings growth. However, history suggests that market leaders struggle to maintain dominance over decades as rising competition erodes profits.
The chart below shows the long-term relationship between PE ratios and subsequent ten-year returns for the S&P 500. If history repeats, the US stock market’s high valuations today could spell lower returns for the next ten years, in contrast to an exceptional run over the past decade.
As noted earlier, this time could well be different. But we believe it's prudent to maintain a balanced approach, just in case it’s not.
Chart 9: Forward PE ratios and subsequent 10-year returns
Focus On What We Control
It’s impossible to predict how the stock market will perform in the short term, and we have no control over it. But we can control the following to ensure you stay on track:
- Staying invested for the long-term and avoiding knee-jerk reactions during market ups and downs.
- Keeping investment costs low ensures that more of your money stays invested, which can compound to make a big difference over time.
- Structuring your investments in a tax-efficient way to help maximise underlying returns.
- Diversifying your investments across different markets and regions to reduce risk and ensure you’re well-positioned to capture growth opportunities wherever they occur.
- Regularly updating your plan to reflect any changes in tax or pension laws, ensuring it stays efficient and effective.
- Rebalancing your investments intermittently to maintain a suitable mix. This approach also provides an automatic buy low / sell high mechanism.
Happy Thursday, and best wishes for a healthy and happy 2025 ahead!
Please note that when investing, your capital is at risk. The value of your investment (and any income from them) can go down as well as up, and you may get back less than you invested, particularly where investing for a short timeframe (we usually recommend a horizon of at least 5 years). Neither simulated nor actual past performance is a reliable indicator of future performance. Investments should be considered over the longer term and fit in with your overall attitude to risk and financial circumstances.
