The global investment landscape in 2024 was marked by a striking divergence between US stocks and their international counterparts. While the S&P 500 surged over 23% and completed its best two-year run since 1998, international markets struggled to keep pace, with the MSCI ACWI ex USA index managing only a 5.5% gain. This disparity highlights both the exceptional strength of US markets and the challenges faced by international investors.
US Stocks’ Remarkable Performance
The US stock market’s stellar performance in 2024 was driven by several key factors. The S&P 500’s 23.3% gain, following a 24.2% increase in 2023, demonstrated remarkable resilience despite global uncertainties. This performance was heavily concentrated in the “Magnificent Seven” tech stocks, which collectively soared 62.7% and now account for a substantial 32% of the S&P 500’s market capitalization.
The strength of US markets was underpinned by:
- Robust economic fundamentals, with the Fed’s Jerome Powell noting that “The U.S. economy is just performing very, very well — substantially better than our global peer group”
- Strong corporate earnings growth, with realized earnings growing at 11% compared to macro-implied growth of 5.5%
- The artificial intelligence boom driving tech sector gains
- Three Federal Reserve rate cuts, supporting market sentiment
However, this impressive performance has led to increasingly stretched valuations. According to the data, US stocks are trading at significantly higher multiples than international peers, raising concerns about potential overvaluation. There’s a more than 10 percentage point gap between the average US stock P/E of 27.4 times and the UK’s 15.9. Meanwhile, Japan’s stock market trades at a P/E of 14.3 and China’s 8.8 times.
International Markets: A Mixed Picture
International equities faced considerable headwinds in 2024. The MSCI EAFE index posted a modest 3.8% gain while emerging markets fared slightly better with a 7.5% return. This underperformance can be attributed to several factors:
- Currency headwinds from US dollar appreciation
- Regional economic challenges, particularly in Europe
- Ongoing geopolitical tensions
Japan: A Notable Exception
The Japanese market was a bright spot among international markets, with the Nikkei achieving nearly a 20% annual gain. Several factors drove this performance. The Bank of Japan’s careful monetary policy management, including its first rate hike in July, and its active management of currency volatility fostered growing confidence in economic recovery. The yen’s weakness against the dollar, reaching a 37-year low of 161.96 in early July, boosted export-oriented stocks. Corporate governance reforms also continued to bolster sentiment. While there were some headwinds from certification scandals in the auto sector during the second half, positive sentiment arose out of merger discussions between major automakers Honda and Nissan.
Signs of Market Excess?
The 2024 performance of US equities was supercharged by the unprecedented inflows into US equity exchange-traded funds throughout 2024. Investors poured more than $1 trillion into US-based ETFs during the year, causing total assets to surge by over 30% and reach a record $10.6 trillion. The enthusiasm reached a fever pitch in November, when ETF inflows hit a monthly record of $164 billion, reflecting heightened investor confidence following Donald Trump’s election victory.
The sheer volume of inflows occurred against an increasingly narrow market focus. The Magnificent Seven stocks have come to represent an unprecedented share of market capitalization, while broader market participation has notably diminished. This concentration risk became particularly evident in November, when a staggering 97% of net inflows to stock funds were directed toward US equities, suggesting a potentially dangerous level of investor conviction in a small number of dominant companies. This narrowing of market breadth, combined with the record-breaking ETF inflows, raises important questions about market stability and the sustainability of current valuations.
Valuations of the different US stock market sectors diverged significantly during the year, resulting in mega-cap stocks trading at historically high valuations that were also elevated versus those that found less favour with investors. For instance, at 38.8, the P/E ratio of the Information Technology sector is well above Energy, which is trading at 15.2 P/E.
Recent Market Developments
The market’s reaction to the Fed’s December rate cut and unexpected cautious tone was notably negative, with the S&P 500 experiencing its worst end-of-year slump on record. The stock markets have also lost ground in the early weeks of 2025. This suggests growing investor anxiety about the potential inflation risks from Trump’s proposed policies, the prospect of fewer expected rate cuts in 2025 than previously anticipated, and the risk of the US market overshooting financial market and economic fundamentals.
Looking Ahead to 2025
Several factors could influence market performance in the coming year. These include the risk of elevated valuations limiting upside potential, an expected deceleration in AI-related capital spending, policy uncertainty around trade and immigration and the possibility of higher Treasury yields impacting valuations.
However, the current market and macro-economic landscape also yield opportunities, such as the potential for broader market participation beyond tech stocks, international markets offering more attractive valuations and continued economic strength supporting corporate earnings
Investment Implications
Despite the US’s continued market dominance, the case for global diversification remains compelling. Valuation disparities across different regions mean international markets offer more attractive entry points and potential for mean reversion in relative valuations.
Thus, investors are encouraged to consider geographic diversification to mitigate country-specific risks and access exposure to different economic cycles and growth drivers. Long-term investors will also benefit from rebalancing toward undervalued markets and exploiting active management opportunities in less efficient international markets.
Conclusion
While US stocks have dominated global markets in 2024, prudent investors should maintain a global perspective. The significant valuation gap between US and international markets and signs of market excess in certain segments suggest that a diversified approach remains crucial. As we enter 2025, the challenge will be balancing the momentum in US markets against the value opportunities presented elsewhere in the world.
This dynamic market environment underscores the importance of careful security selection and risk management across global markets. While the US market’s strength cannot be ignored, diversification and valuation-conscious investing principles remain as relevant as ever.
Garnet O. Powell, MBA, CFA is the President & CEO of Allvista Investment Management Inc., a firm with a dedicated team of investment professionals that manage investment portfolios on behalf of individuals, corporations, and trusts to help them reach their investment goals. He has more than 25 years of experience in the financial markets and investing. He is also the Editor-in-Chief of the Canadian Wealth Advisors Network (CWAN) magazine. He can be reached at gpowell@allvista.ca