The Fed: Q4 2024
Equity: 2024 Equity Market Recap and 2025 Outlook
- Mega-cap tech dominance in 2024 suggests potential market broadening opportunities ahead.
- Rate cuts could drive outperformance in banks, housing and consumer discretionary sectors.
- Healthcare innovation and AI-powered industrials positioned for strong earnings growth in 2025.
The US equity market delivered exceptional returns in 2024, with the S&P 500 gaining an impressive 25%. This stellar performance was primarily driven by valuation expansion rather than earnings growth, raising questions about market sustainability and potential downside risks. As we enter 2025, investors should consider several key themes and sector trends.
Chart 1: Thematic Research Focus
Source: CNR Research, as of January 2025.
*Some stocks are included in more than one theme. Information is subject to change.
Digital Revolution Remains a Key Growth Driver
Mega-cap tech stocks like Apple, Meta, Amazon, and Tesla led the market higher in 2024. We believe these tech giants will continue to be major contributors to S&P 500 gains in 2025. Their dominant market positions and innovative prowess, bolstered by advancements in AI and cloud computing, provide a strong foundation for sustained growth. The massive cloud infrastructure developed by Amazon, Microsoft, and Google has become a global platform fueling innovation across industries.
Healthcare Poised for Gains Despite Policy Uncertainty
While healthcare stocks struggled in 2024 amid policy uncertainties, we see compelling opportunities in 2025, particularly with companies leading in weight-loss drug development. Eli Lilly and Novo Nordisk appear well-positioned for sustained growth as the addressable market expands. Investors may be underestimating the transformative potential of this innovation.
Consumer Spending and Housing to Benefit from Rate Cuts
Durable consumer franchises like Walmart, Costco, and TJ Maxx performed well in 2024 on the back of robust consumer spending. The Fed’s ongoing easing cycle and less hawkish stance should continue to support consumer activity and the housing sector in 2025. Home improvement retailers like Home Depot and Lowe’s may benefit. Restaurant and leisure companies also look attractive at reasonable valuations. While inflation remains a risk to monitor, the Fed is unlikely to hike rates unless inflation surprises significantly to the upside.
Select Industrials Leveraged to AI and Infrastructure Spend
While industrial stocks saw mixed performance, we expect companies exposed to AI infrastructure (e.g., Trane Technologies, Quanta Services) to maintain momentum as AI investments accelerate. The transportation subsector, including rails and trucking, could rebound significantly as economic activity improves, supported by demand dynamics and infrastructure spending.
Attractive Setup for Dividend Stocks in Potentially Volatile Market
Dividend stocks appear well-positioned for 2025 given their defensive characteristics, diversification benefits, and compelling valuations relative to the broader market. The valuation gap between dividend stocks and the S&P 500 is near historic highs, suggesting potential for outperformance and downside mitigation. Dividend stocks have tended to beat the market during periods when value is outperforming growth.
Chart 2: US Large-Cap Valutions vs. Dividend Equities
Source: Bloomberg, as of December 31, 2024.
Information is subject to change and is not a guarantee of future results.
Economic Outlook Supports Slight Overweight to Equities
Our base case calls for 10-year Treasury yields in the 3.75%-4.25% range by year-end 2025, although risks are tilted toward higher yields if inflation surprises to the upside. We have a slightly overweight view on equities following the addition of small-cap stocks to portfolios in November. The economy is expected to grow 2%-3%, a modest slowdown that doesn’t imply recession.
In Closing
While euphoric sentiment and high valuations argue for some caution, economic conditions and the Fed’s accommodative stance remain supportive for risk assets. We favor value company exposure given attractive relative valuations and recommend maintaining a slight overweight to equities while avoiding the temptation to significantly increase risk budgets after a strong run. Remaining balanced and discerning feels prudent as the market adapts to the evolving economic landscape.
Important Information
The views expressed represent the opinions of City National Rochdale, LLC (CNR) which are subject to change and are not intended as a forecast or guarantee of future results. Stated information is provided for informational purposes only, and should not be perceived as personalized investment, financial, legal or tax advice or a recommendation for any security. It is derived from proprietary and non-proprietary sources which have not been independently verified for accuracy or completeness. While CNR believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations,estimates, projections, and other forward-looking statements are based on available information and management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions which may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Diversification may not protect against market risk or loss. Past performance is no guarantee of future performance.
There are inherent risks with equity investing. These risks include, but are not limited to stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junkbond. When interest rates rise, bond prices fall.
Bloomberg risk is the weighted average risk of total volatilities for all portfolio holdings. Total Volatility per holding in Bloomberg is ex-ante (predicted) volatility that is based on the Bloomberg factor model.
Municipal securities. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible. Investments in the municipal securities of a particular state or territory may be subject to the risk that changes in the economic conditions of that state or territory will negatively impact performance. These events may include severe financial difficulties and continued budget deficits, economic or political policy changes, tax base erosion, state constitutional limits on tax increases and changes in the credit ratings.
City National Rochdale, LLC is an SEC-registered investment adviser and wholly-owned subsidiary of City National Bank. Registration as an investment adviser does not imply any level of skill or expertise. City National Bank is a subsidiary of the Royal Bank of Canada.
© 2025 City National Bank. All rights reserved.
Index Definitions
S&P 500 Index: The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the US It is not an exact list of the top 500 US companies by market cap because there are other criteria that the index includes.
Bloomberg Municipal Bond Index: The Bloomberg US Municipal Bond Index measures the performance of investment grade, US dollar-denominated, long-term tax-exempt bonds.
Bloomberg Municipal High Yield Bond Index: The Bloomberg Municipal High Yield Bond Index measures the performance of non-investment grade, US dollar-denominated, and non-rated, tax-exempt bonds.
Bloomberg Investment Grade Index: The Bloomberg US Investment Grade Corporate Bond Index measures the performance of investment grade, corporate, fixed-rate bonds with maturities of one year or more.
The Bloomberg US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury.
Bloomberg Municipal Bond Muni Short (1-5) Index 1-5 year maturities of the US Municipal bond index.
The Bloomberg Muni Intermediate Index is an unmanaged index that tracks the performance of intermediate US government securities.
The Bloomberg US Government/Credit 1-5 Year Index tracks USD-denominated, investment grade, fixed-rate bonds, including treasuries, government-related and corporate issues. The Index includes securities with at least one, and up to, but not including, five years until final maturity.
The taxable Intermediate Government/Credit Credit Index measures the investment grade, US dollar-denominated, fixed-rate, taxable corporate and government-related bond markets with a maturity greater than 1 year and less than 10 years.
The Morningstar LSTA US Leveraged Loan 100 Index is a daily tradable index for the U.S. market that seeks to mirror the market-weighted performance of the largest institutional leveraged loans. It represents the 100 largest and most liquid issues in the institutional loan universe and is a cornerstone for measuring the pulse of the leveraged loan market.
The Bloomberg US High Corporate Bond Yield to Worst Index represents the semi-annual yield to worst of the ICE BofA US High Yield Index, which tracks the performance of US dollar denominated below investment grade rated corporate debt publicly issued in the US domestic market.
The ICE BofA High Yield Emerging Markets Corporate Plus Index is a subset of the ICE BofA Emerging Markets Corporate Plus Index, which includes only securities rated BB1 or lower.
The Palmer Square CLO Debt Index is a rules-based observable pricing and total return index for collateralized loan obligation (CLO) debt for sale in the United States.
Yield to worst (YTW) is the lowest yield that can be realized by either calling or putting on one of the available call/put dates, or holding a bond to maturity.
Indexes are unmanaged and do not reflect a deduction for fees or expenses. Investors cannot invest directly in an index.
Definitions
Yield to Worst (YTW) is the lower of the yield to maturity or the yield to call. It is essentially the lowest potential rate of return for a bond, excluding delinquency or default.
P/E Ratio: The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS).
The 4P analysis is a proprietary framework for global equity allocation. Country rankings are derived from a subjective metrics system that combines the economic data for such countries with other factors including fiscal policies, demographics, innovative growth and corporate growth. These rankings are subjective and may be derived from data that contain inherent limitations. MSCI Emerging Markets Asia Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the Asian emerging markets.
The Magnificent Seven stocks are a group of high-performing and influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.
City National Rochdale Proprietary Quality Ranking formula: 40% Dupont Quality (return on equity adjusted by debt levels), 15% Earnings Stability (volatility of earnings), 15% Revenue Stability (volatility of revenue), 15% Cash Earnings Quality (cash flow vs. net income of company) 15% Balance Sheet Quality (fundamental strength of balance sheet).
*Source: City National Rochdale proprietary ranking system utilizing MSCI and FactSet data. **Rank is a percentile
ranking approach whereby 100 is the highest possible score and 1 is the lowest. The City National Rochdale Core compares the weighted average holdings of the strategy to the companies in the S&P 500 on a sector basis. As of September 30, 2022. City National Rochdale proprietary ranking system utilizing MSCI and FactSet data.
BPS: A basis point (BPS) is used to indicate changes in the interest rates of a financial instrument. Basis points are typically expressed with the abbreviations “bp,” “bps,” or “bips.”
A consensus estimate is a forecast of a public company’s projected earnings based on the combined estimates of all equity analysts that cover the stock.
Bureau of Labor Statistics(BLS): The BLS is a federal agency that collects and disseminates important information about labor, wages, prices, and productivity.
Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.
© 2025 City National Bank. All rights reserved.
Non-deposit investment Products are: • not FDIC insured • not Bank guaranteed • may lose value
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