We talk about what happened, why it happened, discuss the impact on client portfolios and share some graphs and data from our research team.
Our research team — Sean And Mat – did such a great job this quarter that I decided to share some of the charts.
Let’s see.
The bull market continued for another year, but so did the fundamentals:
The market is becoming increasingly concentrated. Companies are getting bigger and bigger. But that also applies to income. It was another good year for earnings growth, which nearly matched the S&P 500’s gains.
This is good news.
Speaking of fundamentals, take a look at the difference in price-to-earnings ratios between the Mag 7 and the rest of the S&P 500:
This is the hardest part of measuring the fundamentals of today’s stock market: Valuations are much higher for big tech stocks than for the rest of the market.
But these are also the largest and most profitable companies in history. They deserve a higher rating. So when does it become a concern?
It really depends on the embedded expectations and what happens to revenues from here. That sounds like a cop, but it’s the truth.
There is a much lower margin of safety with megacap technology than with anything else:
The biggest bull case for smaller stocks is the fact that valuations and therefore expectations are lower. It doesn’t take much good news for smaller companies to close this gap.
Perhaps small caps will become the international of 2025. The country’s performance figures last year were quite surprising:
The US stock market was near the bottom of the list. No one saw this coming last year.
Why did international stocks have such a good year? Here is the attribution broken down by fundamentals, currency movements and emotions:
The falling dollar was a tailwind for foreign stocks last year, but earnings growth was also good. Everything went well for foreign stocks last year.
Will it last? Don’t know.
It is also interesting to look at the differences in factor performance between US and international markets:
Value stocks underperformed in US markets last year. But look at the value, shareholder returns, and low-volume stocks abroad: they’ve been crushed!
This is why diversification can be so maddening and eye-opening: you never know where the outperformance will come from.
Let’s end with the boring but necessary stuff.
The bond market is healing:
In recent years, short-term returns have been higher or comparable to longer-term returns. That is not the normal state of the risk-reward relationship.
The yield curve is starting to look normal again.
It’s been a terrible decade for bonds, but yields are in a good place for fixed income investors right now.
What does this mean?
Future returns for bond investors should be decent, as starting yields are the best predictor of future returns:
Bond yields are still pretty decent today.
The returns in the future should be the same.
If you would like to know more about what it is like to be a Ritholtz customer, please contact us here.
Further reading:
Historical returns for stocks, bonds, cash, housing and gold
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