U.S. Equities Lead 2024’s Records Into 2025’s Crossroads

2024 marked a year of records and extremes. Powered by big tech and the AI revolution, U.S. markets dominated globally. New financial avenues were born as the first cryptocurrency ETFs launched, sending Bitcoin beyond $100,000. As interest rates surpassed 5%, investors began thinking about their cash differently and poured into money market funds. However, some of the new market records have brought concerns. The historic highs in U.S. equities came with record concentration as seven stocks ended the year making up one-third of the S&P 500.1 Further, the rally in U.S. equities has left stocks at a forward P/E multiple that has historically preceded muted performance over the next decade.2 Some institutional players have seen the writing on the wall and delved into alternative investments to help drive returns. As individual investors look to 2025, they should not necessarily expect another 2024 and would also be wise to consider alternative investments.

U.S. equities dominated global markets in 2024. The S&P 500 returned over 23% behind the strength of big tech and the AI revolution.3 The market capitalization of U.S. equities surpassed $63 trillion, adding $11 trillion over the course of the year. The U.S. stock market remained the envy of the world as the other major economies struggled to keep up. The STOXX Europe 600 returned 6%, Japan’s Nikkei 225 returned 19.2%, and China’s Shanghai Composite returned 12.7%. As U.S. equities outperformed, their share of the global equity market rose considerably, surpassing 50% for the first time in roughly twenty years.

Percentage of Total Market Cap

Source: Investing News. October 2024. “What Was the Highest Price for Gold?”

Returns in U.S. equities in 2024 were largely driven by big tech and the continuation of the AI revolution. Nvidia’s market cap surpassed $2 trillion in February, eclipsed $3 trillion in June, and became the world’s largest company on June 18th. The global demand for artificial intelligence and the chips that power the revolution proved to be insatiable in 2024. The magnificent seven of Amazon, Meta, Apple, Microsoft, Alphabet, Nvidia and Tesla reached a market cap of $17.6 trillion, surpassing the entire $16.1 trillion European equity market.5 The unparallelled growth of the magnificent seven meant increasing their share of the S&P 500 from ~25% to ~33%, representing a rising concentration risk in U.S. equities.1

2024 brought major changes to capital markets. In January, the first Bitcoin ETFs were approved and opened for trading. The BlackRock Bitcoin ETF IBIT had in-flows of $37.25 billion, highlighting the growing institutional appetite for cryptocurrencies and investor confidence in digital assets.4 With rising institutional demand and new capital markets to tap into, Bitcoin roared to new all-time highs of $100,000 and beyond. Proponents of cryptocurrency see bitcoin representing a store of value in the long-term, and gold, another relatively safe stores of value, set a record with a new all-time high of ~$2,800.5 After a persistent period of sticky inflation that ate away purchasing power, investors changed the way they thought about their cash. Aside from stores of value, investors wanted higher interest for their deposits as rates topped 5%. Cash poured into money market funds that set a record of $6.76 trillion in AUM.6

The record setting rallies of 2024 were a welcome sign for investors but brought with them their own set of risks. The market capitalization of U.S. equities surpassed $63 trillion and the S&P 500 ended the year with a forward P/E multiple over twenty - historically a harbinger of a prolonged period of muted returns.2 In the past, the decade following current valuations was marked by annualized equity returns of 2%. The frothy valuations have made many investors nervous about the years to come and helped drive growth in private markets. BlackRock's acquisitions of HPS Investment Partners, Preqin and Global Infrastructure Partners, along with Capital Group's strategic partnership with KKR, reflect a growing trend of major financial institutions entering and expanding their presence in the private alternatives market to meet investor demand. As investors seek better returns through alternative investments, the private credit market alone is set to double in size to $3 trillion by 2027.7 The alternative investment space is expected to see sustained growth in 2025 as accessibility widens and investors search for returns outside of public markets.8

Average S&P 500 Forward Returns (Annualized)

Source: FS Investments. October 2024. “Historically high valuations challenge equity returns”

Markets have roared to all-time highs in 2025, led by U.S. equities dominating the world. Big tech had a banner year as the AI revolution rolled on. Nvidia gained $2.1 trillion in market cap, cementing itself as a major global player that can move markets on its own accord. The first Bitcoin ETF was launched and had in-flows of $37.25 billion, sending Bitcoin beyond $100,000 and signaling an increased global willingness to invest in digital assets. Persistent inflation drove record flows into money market funds as yields topped 5%, bringing new perspectives on cash management. However, the new records come with new risks. The peaks set by big tech have led to a record level of concentration among U.S. equities as the magnificent seven now make up one-third of the S&P 500. The lofty valuations and forward multiples in U.S. equities have historically led to a decade of muted returns. As investors turn the page from 2024 to 2025, they should be wary of the concentration risk in U.S. equities and lofty valuations. To drive returns in 2025 and beyond, investors should consider adding alternative investments to their portfolios.

Sources:

1. Wall Street Journal. December 2024. “2024 Has Been a Year of Extremes in the Stock Market. Can It Last?”
2. FS Investments. October 2024. “Historically high valuations challenge equity returns”
3. MarketWatch. January 2025. “U.S. stocks dominated global markets in 2024 — why they likely won’t in 2025”
4. The Crypto Basic. :January 2025. “BlackRock Bitcoin ETF Breaks Into Top 3 Global ETFs Amid Record $1.14T Inflows in 2024”
5. Investing News. October 2024. “What Was the Highest Price for Gold?”
6. Wall Street Journal. December 2024. “The Biggest News Stories of 2024”
7. Wall Street Journal. December 2024. “BlackRock Strikes $12 Billion Deal for HPS, Betting Big on Wall Street’s Hottest Market”
8. AET. December 2024. “The Alternative Investment Landscape in 2025”