Quarterly Newsletter - Q1 2025

MARKET RECAP 

Happy 2025!

2024 proved to be another outstanding year for equity investors, with the S&P 500 delivering an impressive return of over 20% for the second consecutive year. This was driven primarily by the so-called "Magnificent 7" stocks—Microsoft, Amazon, Meta, Apple, Alphabet, Nvidia, and Tesla—which collectively contributed 13.7% of the S&P 500's 23.3% total gain for the year. Their dominance underscored the continued influence of mega-cap tech companies in powering market returns.¹

The fourth quarter was particularly eventful, shaped by the interplay of political developments and monetary policy decisions:

• U.S. Presidential Election: The re-election of Donald Trump buoyed markets as investors gained clarity on Republican policies emphasizing deregulation, tax cuts, and a focused approach to tariffs. This outcome reinforced confidence in a pro-business environment, driving market gains, particularly in sectors poised to benefit from such policies.²
• Federal Reserve Policy: The Federal Reserve implemented rate cuts of a quarter of a percentage point in both November and December, totaling 0.5% for the fourth quarter. However, the release of the December Summary of Economic Projections introduced mixed signals that injected volatility into the markets. The projections included upward revisions to 2025 growth and inflation forecasts, coupled with a lower unemployment outlook. Adding to market uncertainty, the Fed’s “dot plot” suggested fewer rate cuts in 2025 and beyond.^3,4
• Bond Market Reaction: Bonds faced notable headwinds during the fourth quarter. Stronger-than-expected economic growth, inflationary policies, and concerns over additional deficit spending led to a sell-off in fixed-income markets. Yields on the 10-year Treasury rose significantly, climbing from 3.78% at the start of the quarter to 4.54% by year-end.⁵

Despite these mixed signals and occasional volatility, equity markets demonstrated resilience, buoyed by strong corporate profits, investor optimism, and an ongoing artificial intelligence boom.⁶ The fourth quarter closed out another successful year for investors, laying the groundwork for what promises to be an interesting and dynamic 2025.

I’ll refrain from offering any forward-looking commentary for now, as I’ll be sending out a comprehensive outlook for the year ahead next week.

PLANNING AHEAD

The start of a new year provides a natural opportunity to revisit and refine your financial plan. It’s a time to assess where you stand, evaluate progress toward your goals, and make adjustments to ensure your financial strategy remains aligned with your current needs and future aspirations.

 As we begin 2025, here are a few key reminders:

• Review and update your financial plan: Ensure your plan is up-to-date and aligned with your current goals, as well as any recent life events or financial changes.
• Evaluate asset allocation and rebalance your portfolio: Review and rebalance your investments to ensure they remain aligned with your risk tolerance, time horizon, and long-term objectives. Significant market movements can lead to misalignment, either increasing or decreasing your exposure to risk.
• Review your estate plan: Verify that your wills, trusts, powers of attorney, and other estate documents are up to date. Make any necessary updates to reflect changes in your personal, family, or financial circumstances.
• Review account beneficiaries: Confirm that the beneficiaries on your retirement accounts, insurance policies, and other financial instruments are up-to-date.

FINANCIAL INSIGHTS

 As I previously noted, more than half of the S&P 500’s 2024 return was driven by just seven companies. Given this significant concentration, I thought it would be valuable to take a closer look at the S&P 500 index’s construction and examine the potential implications for investors.

What is the S&P 500 Index?

The S&P 500 Index, managed by Standard and Poor’s, is composed of 500 of the largest publicly traded companies in the United States. It is one of the most widely recognized benchmarks for U.S. equity performance, reflecting the overall health and direction of the U.S. stock market.

 Although you can’t directly invest in the S&P 500 itself, numerous securities are designed to track its performance, including ETFs and mutual funds. As of December 31, 2023, an estimated $10 trillion was invested in various instruments following the index.⁷

How is the S&P 500 Constructed?

The S&P 500 is a “market capitalization-weighted” index, meaning companies with larger market capitalizations (calculated as share price multiplied by outstanding shares) have a greater influence on its performance. Simply put, the more valuable a company, the greater its weight and impact in the index.

 Top 10 positions in the S&P 500 index as of January 3, 2025.⁸

As illustrated, the top 10 positions account for nearly 39% of the index, with the top 5 holdings alone making up nearly 29%. From a sector perspective, the index is similarly concentrated, with nearly 44% allocated to information technology.

Other indices can exhibit even greater concentrations. For instance, the top 10 holdings of the NASDAQ 100 account for more than 50% of the index.⁸

Why Is This Important?

1. Understanding What You Own: An axiom I often share is, “know what you own and why you own it.” Whether you’re investing in an S&P 500-tracking ETF or comparing your portfolio’s performance against the index, understanding its construction is critical. The market-weighted structure means a significant portion of your investment may be concentrated in just a few companies, which can heavily influence your returns.
2. Managing Concentration Risk: Many investors unknowingly take on concentration risk in their portfolios. For example, if you already hold sizable individual positions in companies like Apple, Microsoft, Amazon, or NVIDIA, adding an S&P 500 and/or NASDAQ index-tracking security could increase your exposure to these same names and provide less diversification than expected. Ensuring your portfolio is diversified across sectors and individual holdings is essential to managing risk effectively.
3. Effective Benchmarking: While the S&P 500 is a popular benchmark, it’s important to recognize that most well-constructed portfolios include a broader mix of assets beyond large-cap U.S. equities, such as international stocks, small-cap companies, and fixed income. Benchmarking against a more comprehensive index or customized portfolio objective may provide a better measure of your performance and alignment with your financial objectives.

The Bottom Line

Understanding the structure of the S&P 500 and the implications of its market-weighted allocations is essential for informed investing. By delving into what you own and why, you can better assess your portfolio's diversification and alignment with your financial goals and risk tolerance.

-Adam 

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All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.  All economic and performance data is historical and not indicative of future results.  All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.

Standard & Poor’s 500(S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  Indexes are unmanaged and do not incur management fees, costs, or expenses.  It is not possible to invest directly in an index. 

Dow Jones Industrial Average (DJIA) is a price-weighted index of 30 actively traded blue chip stocks.  Indexes are unmanaged and do not incur management fees, costs or expenses.  It is not possible to invest directly in an index.

Nasdaq is a global electronic marketplace for buying and selling securities. Originally an acronym for "National Association of Securities Dealers Automated Quotations"—it was a subsidiary of the National Association of Securities Dealers (NASD), now known as the Financial Industry Regulatory Authority (FINRA). Indexes are unmanaged and do not incur management fees, costs, or expenses.  It is not possible to invest directly in an index.

¹ S&P Global, US Equities Market Attributes, Dec 2024 ² Goldman Sach, Trumps Election Forecast for US Stocks ³Federal Reserve, Summary of Economic Projections, December 2024 ⁴ JP Morgan, December 2025 Fed Meeting⁵ Morningstar Markets, 13 Charts on Q4    ⁶Morningstar, 2024 Review and 2025 Outlook ⁷S&P 2023 annual survey of assets ⁸ Yahoo Finance