The ASX 200 fell 3.2% in December as expectations that interest rates would be cut aggressively by the US Federal Reserve in 2025 faded as the economy continued to show remarkable resilience. The weakness in stock prices in December was, however, an anomaly in 2024 as global equities delivered a second consecutive year of double- digit total returns. Remarkably the rise in US S&P 500 in the past two years has been one of the strongest since 1928, largely driven by strong earnings growth by the Magnificent 7 companies (Apple, Microsoft, Alphabet, Amazon, NVIDIA, Meta, & Tesla).
The ASX 200 also enjoyed another year of higher returns (+7.5%), yet the re-rating was primarily driven by PE valuation expansion rather than earnings growth. Banks accounted for the bulk of the ASX 200 return, delivering a total return of >30% in 2024. The best performing factor theme for the ASX 200 was Price Momentum ~+19.5% versus Value ~+3.7%. Growth whether in the US or Australia was clear winner in 2024.
The bifurcation of returns for the ASX 200 was stark with the Banks, Technology and Discretionary consumer stocks delivering the strongest returns compared to the laggard returns of the commodity sector with Energy and Materials falling ~18% for 2024.
For December at a sector level, Consumer Staples (+0.5%) and Energy (+0.3%) contributed positive returns. In marked contrast, Real Estate (-6.9%), Materials (-4.5%), and Financials (-4.1%) lead the declines.
A looming threat overhanging equity markets is that inflationary pressures remain persistently higher than central banks would like. Clearly, this concern has weighed on the US Federal Reserve by adopting a “careful approach” in cutting interest rates further this year on concern that easier credit conditions could re-ignite inflationary pressures.
While the ASX 200 PE valuation adjusted lower in December as prices fell, valuations remain elevated on a 12-month forward PE ~18 times, well above its historical average of ~14.4 times. For the equity market to make further sustainable gains this year, it needs to be accompanied by earnings growth and at least in the short term this looks challenging with market expecting modestly negative earnings growth for the remainder of FY25. In the absence of near-term earnings growth, and persistently higher bond yields, equity markets are vulnerable to a pull-back. With this backdrop, we felt it prudent to raise cash levels in December to ~10% in the portfolio. An emphasis on earnings quality and balance sheet strength remains steadfastly important.
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