BCN Advantage – 2024 Annual Report
For 2024, the S&P 500 rose +23.3% to 5,882, the Nasdaq +28.6% to 19,311, and the Dow +12.9% to 42,544. The IBD Mutual Fund Index gained +8.78%. 2024 marked the second consecutive year the S&P 500 rose more than +20%, a feat not seen since 1997-1998. In September, the Fed slashed rates by a half percentage point, followed by additional quarter-point cuts in November and December. The action marked the Fed’s first easing since 2020 and the termination of its most aggressive inflation-fighting campaign since the 1980s. Enthusiasm over Gen AI caught fire. For the second year in a row, the "Magnificent Seven" drove the lion's share of gains. Apart from these 7 companies, the rest of the S&P 500 gained a mere 6.3% in 2024, and only 4.1% in 2023. DeepSeek triggered a sharp selloff. Nvidia was especially hard hit, suffering a near $600 billion loss of market cap in one day. DeepSeek claims its breakthrough model was developed using inferior Nvidia chips and cost less than $6 million. That's staggeringly low, given OpenAI’s ChatGPT cost more than $100 million to train. Two years into the Gen AI phenomenon, just 11% of companies are in large scale production with AI initiatives. DeepSeek could be good news if the reduction in Gen AI costs enables wider adoption. Accelerated innovation could lead to the development of more advanced models, better algorithms, and new use cases for AI across industries. The top 7 companies in the S&P 500 are all Gen AI related and comprise over 33% of the index. Gen AI capex is slated to reach $425 billion in 2025. A foreign competitor offering a rival product at a fraction of the cost throws into question the exorbitant spending of American tech giants. Trump announced his plan for reciprocal tariffs – global tariffs customized on a country-specific basis and expected to go into effect by early April. The immediate consequence is higher consumer prices. The stock market is likely to react negatively, particularly in sectors heavily reliant on international trade. Currently, 41% of corporate revenue is derived from exporting goods and services. Over the longer term, these headwinds may largely be offset by tax cuts, deregulation, and reduced energy prices, which should cut production costs. Since bottoming in June, inflation has accelerated. January core prices rose 3.3% for the year, and 0.4% over the prior month, the largest monthly increase since April 2023. Inflation expectations rose to 4.3%, the biggest jump in over a decade. In hindsight, the Fed’s rate-cutting campaign looks too aggressive. Traders expect one cut for all of 2025 – and not until July, at the earliest. Ten-year rates have jumped sharply, from about 3.6% in September (the initial rate cut) to 4.5% today. Historically, ten-year rates should reach the 5.5% range and potentially 6% or higher. The negative impact is evident in an economy supported by rising debt levels. Average borrowing costs on our $36T national debt have increased from 1.5% to 3.5%, adding more than $700 billion per year to debt service. US corporate bankruptcies hit a 14-year high in 2024. Same for credit card delinquencies. Over the past two years, ongoing fiscal stimulus from the Inflation Reduction Act ($891B) and Secure 2.0 Act ($1.7T) have supported economic growth. At the same time, the Fed has quietly reduced its balance sheet by nearly $2 trillion – a pace of more than $75 billion per month. These are the most dangerous headwinds facing the markets (because their combination is the least expected): (1) continued quantitative tightening, draining liquidity, (2) elevated inflation, forcing borrowing rates to remain high, (3) reduced fiscal stimulus as previous spending bills are exhausted without new ones to take their place. A generation of investors has been conditioned to “buy any and all dips.” Given an S&P 500 that has skyrocketed from 667 in early 2009 to over 6100 today, it’s easy to understand why. Investor confidence for the next 12 months is near the highest levels on record. A recent AAII survey of retail investors shows an average 70% allocation to stocks, levels seen at previous market peaks and only slightly lower than the peak during the Dot.com mania. While not predictive of a near-term market correction, the survey does suggest much of the anticipated market gains are already priced in. Wall Street’s median estimate is for the S&P 500 to rise to 6600 this year, which would be a ‘disappointing’ return of just 12% after two years of 20%+ gains. As usual, no major analyst projected a negative return. Experienced investors understand the danger of late-stage bull markets. One example: Warren Buffett, currently sitting on a record $325 billion cash pile. When Trump entered his first term, the S&P 500 stood at 18x forward earnings. Today, the index P/E is 23x, well above the five-year average of 19.7 and 10-year average of 18.2. It’s only been higher during the 2021 post-pandemic boom and the 2000 Dot.com bubble. This leaves little room for error. Investors are betting on flawless results in a year when macroeconomic uncertainties loom large.
