LESSONS LEARNED IN 50 YEARS
By PETER JONES, CFA Executive Vice President Ferguson Wellman Capital Management
A resilient U.S. economy defied skeptics in 2024 as blue-chip stocks notched a second consecutive year of robust returns. Profit growth and equity valuations expanded, and the yield curve began to normalize amid Federal Reserve interest rate cuts. The megacap technology themes of cloud computing, cybersecurity and artificial intelligence have proven to be key profit drivers. The combined earnings growth of the “Magnificent Seven” (Mag 7)—Meta (Facebook), Alphabet (Google), Amazon, Microsoft, Apple, Nvidia and Tesla—account- ed for approximately two-thirds of the S&P 500’s profit growth in 2024.
Peter Jones, CFA, is an equity analyst and portfolio manager for Ferguson Wellman. He also serves on the firm’s investment policy committee. Ferguson Wellman is a privately owned investment advisor with offices in Portland, Oregon and Bellevue, Washington. As of December 31, 2024, the firm manag- es $8.9 billion for 1,026 clients.
mentals in the market and economy. Those who think tariffs will be an extraordinary success are likely to be disappointed. Those who think tar- iffs will push inflation back to 2022 levels are likely to be relieved. We think the ultimate implementation and market impact of tariffs will be less than the media suggests. Similarly, despite the efforts of “DOGE,” it will be very difficult to make a dent in the $2 trillion annualized budget deficit. After entitlements, interest expense and defense spending, the remaining discretionary budget is less than $800 billion. LESSONS LEARNED
Flipping the script, the remaining 493 members of the S&P 500 are ex- pected to generate the same percentage of overall earnings growth in 2025. Electricity demand growth tied to the buildout of data centers, in- creasing demand for healthcare and a nearshoring of capital investment are themes supporting a more diversified earnings picture in the coming year. Because profit growth is balanced in 2025, we also expect market participation to broaden beyond the Magnificent Seven. In our view, a broader market is a healthy development as reliance on such a small number of companies to achieve market gains cannot persist forever. Thanks to a normalization of most of the extremes of the COVID era, 2024 was a year of economic stability. Despite current worries regarding trade policy, high deficits and new tariffs, we expect a continuation of rel- ative economic stability. Key variables such as unemployment, inflation, GDP growth and interest rates are likely ending 2025 near the same levels they are now. Turning to our firm’s fiftieth anniversary, we ponder lessons learned. Re- garding the stock market, history doesn’t repeat itself, but often rhymes. Fifty years ago, the Nifty Fifty was ascendant, like the Mag 7 is today. The Nifty Fifty comprised industry leaders of the day such as IBM, Sears, Polaroid, McDonald’s and Xerox—stocks that investors were advised to buy and never sell. Today, some of these companies are bankrupt and no longer exist, disproving the notion of “one-decision stocks.” Company fundamentals change and valuations matter. We believe ongoing profit growth will support positive returns for equities this year; however, af- ter two years of equity returns in excess of earnings growth, presently elevated valuation suggest stock market returns will likely be less than presently estimated earnings growth of 12% in 2025. We think it will be important for investors to “turn down the volume” in 2025, separating emotions and headlines from the underlying funda-
Regarding asset allocation, we remain overweight large-cap U.S. equi- ties, while continuing to underweight both small-cap and international stocks. With bonds offering attractive yields near 5%, we are neutral weighted the fixed income asset class and have de-emphasized alter- native investments. Given expectation for a similar macroeconomic land- scape to the year just ended, our asset allocation theme is summed up by another lesson learned— sometimes the hardest thing to do is nothing. DISCLOSURES Opinions and statements of financial market trends based on current market conditions constitute our judg- ment and are subject to change without notice. Due to the rapidly changing nature of the financial markets, all information, views, opinions and estimates may quickly become outdated and are subject to change or correction. We believe the information provided is from reliable sources but should not be assumed accu- rate or complete. Reference to or by non-employee individuals and institutions herein does not serve as an endorsement of, or testimonial for, the investment strategies and services of Ferguson Wellman and West Bearing Investments. The information published herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or to buy securities, investment products or investment advisory services. Ferguson Wellman and West Bearing are not qualified or licensed to, and do not provide tax, legal, insur- ance, or medical advice or services. We may provide referrals for third-party professionals including tax and legal advisors. You are solely responsible for the ultimate selection of such professionals. Ferguson Wellman and West Bearing are not responsible for (i) the appropriateness, quality or accuracy of advice or services rendered by any third-party professional engaged by you, (ii) the implementation, monitoring or updating of any recommendations made by any third-party professional engaged by you, or (iii) the implementation, monitoring or updating of any recommendations made by Ferguson Wellman which are considered or acted upon by any third-party professional engaged by you. You may find links to websites that are not managed by Ferguson Wellman or West Bearing. We do not take any responsibility for reviewing, updating or ensuring the accuracy of information on other websites. Fergu- son Wellman and West Bearing disclaim responsibility for the legality of materials and copyright compliance on other websites. This information is provided for informational purposes only.
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