As we look ahead to 2025, here are some key market observations and investment considerations.

U.S. Stocks Outperformed in 2024

U.S. large-cap stocks took a clear lead in 2024, delivering a return of 25.02%, followed by U.S. small-cap stocks at 11.54%. Most asset classes finished the year positive, with the notable exception of cash.

Tech Sector Led, but Broadening Market

The technology sector, along with consumer discretionary and financial stocks, continued to perform strongly. However, cyclicals made a comeback in the last quarter of 2024.

Economic Growth and Interest Rates

The U.S. economy continued its growth trajectory, exceeding expectations in 2024. Meanwhile, unemployment remained within a healthy range. The Federal Reserve began cutting interest rates in September 2024 to stimulate the economy.

Inflation Declining, but Persistent

Inflation progressed toward the target, declining from 2022 highs. However, government spending and other factors could keep prices elevated.

Investment Opportunities in 2025

Given these dynamics, we favor a "leaning into stocks" approach for 2025, particularly large-cap U.S. companies with strong earnings growth potential. Additionally, we suggest adding to higher-income bonds, especially those with shorter durations. As inflation persists, exploring alternative investments for diversification, such as precious metals, may also be beneficial.

Remember, pent-up business activity due to delayed investments in 2024 could provide a significant tailwind for stocks in 2025.

Sources: Bloomberg. Bureau of Labor Statistics. Federal Reserve. BlackRock.