At Canty Financial Management, we focus on providing strategic insights and disciplined portfolio management. In this update, we review the key market developments of 2024, share our outlook for 2025, and outline the principles guiding our portfolio strategies, including diversification, quality, and tax efficiency.
Year in Review for 2024
In 2024, the markets experienced a year of increased clarity across key economic themes.
- The Federal Reserve initiated highly anticipated interest rate cuts as inflation continued its downward trend, marking a significant shift in monetary policy. This environment created favorable conditions for both equity and fixed-income markets.
- U.S. large-cap equities led the charge, bolstered by resilient consumer spending, steady corporate earnings growth, and improved guidance from over half of the S&P 500 companies. Notably, U.S. equities outperformed their international developed market counterparts, which faced challenges such as weaker growth and subdued consumer demand. This boded well for our model portfolios, which maintained an overweight position in U.S. equities.
- Earnings growth in U.S. large caps marked its fifth consecutive quarter of gains, with the S&P 500 ex-Magnificent 7 achieving modest improvements.
- In fixed income, high-yield credit markets benefitted from improving fundamentals, with more upgrades than downgrades and historically low default rates.
- Core bonds provided stability, while extended credit strategies delivered attractive risk-adjusted returns amid tighter spreads and consistent yields.
Throughout the year, our portfolios maintained a strategic approach, emphasizing diversification and quality, which positioned them well for both the recovery and uncertainties of the macroeconomic environment. This disciplined focus on long-term outcomes sets the foundation for future success as we move into 2025.
Current Market Environment
As we move into 2025, the market environment reflects several key developments that will shape the investment landscape. The Federal Reserve’s interest rate cuts have provided a more favorable backdrop for equities and fixed income, as monetary policy has shifted to a more supportive stance. Inflation has continued its decline, though the relationship between labor market conditions and inflation remains a critical factor as the Federal Reserve balances economic growth and interest rate policy.
U.S. equities are poised to benefit from an extension of the business cycle, with a broader base of earnings growth anticipated beyond the largest market players. According to recent forecasts, the S&P 500 (excluding the Magnificent 7) is expected to deliver earnings growth of 13% in 2025, a significant improvement from 2024. This broadening of earnings across market capitalizations supports the case for continued U.S. equity exposure, particularly in high-quality names.
In fixed income, the landscape remains favorable for diversification. While yields have remained attractive, reinvestment risk is a growing consideration as the federal funds rate has declined. High-yield bonds continue to present opportunities, supported by improved credit fundamentals and low default rates. Meanwhile, core bonds remain an important component for stability in portfolios, particularly in the face of economic uncertainty.
Portfolio Themes for 2025
Our model portfolios remain strategically positioned to capture opportunities while managing risks in this evolving environment. We continue to emphasize the following key themes:
- Quality and Balance in Equities
We maintain a modest overweight in U.S. equities, with a preference for large-cap, high-quality companies. Diversification across styles (growth and value) and market capitalizations (large, mid, and small caps) ensures that portfolios are well-positioned to benefit from the broadening of earnings growth. An allocation to active portfolio managers remains a cornerstone of our equity approach, enabling us to identify and capitalize on opportunities.
- Strategic Fixed Income Exposure
In the fixed-income space, we continue to prioritize diversification across high-quality traditional bonds, securitized assets, and extended credit markets. Core bonds provide a foundation of stability, while exposure to high-yield and multi-sector income strategies offers attractive income opportunities in a low-default environment. We are closely monitoring duration exposure to balance income generation with interest rate sensitivity.
- Diversification Across Regions and Sectors
While we retain a U.S. equity overweight, we also maintain a diversified exposure to global markets to capture opportunities and manage risk. Sector diversification within equities further reduces concentration risk and enhances long-term portfolio resilience.
- Focus on Long-Term Goals
Our portfolios are built with a long-term, strategic approach rather than reacting tactically to short-term market conditions. This disciplined focus enables us to navigate periods of volatility and uncertainty while remaining aligned with clients’ goals. Multi-asset portfolios continue to offer compelling return potential, with our long-term forecasts favoring equities and fixed income over cash.
- Tax Efficiency
Tax efficiency remains a cornerstone of our portfolio management approach. By leveraging strategies such as tax-loss harvesting and tax-efficient withdrawals, we aim to minimize tax liabilities and enhance after-tax returns for our clients. Our rebalancing software tools like 55IP allow us to implement systematic tax management across portfolios, ensuring that taxes are proactively addressed without compromising long-term investment goals.
Looking ahead, we anticipate continued strength in U.S. equities, supported by resilient corporate earnings and steady consumer activity. In fixed income, attractive yields and low default rates present compelling opportunities for income generation and portfolio stability. By emphasizing diversification, making proactive adjustments, and maintaining a focus on quality, our portfolios are well-positioned to navigate market changes and capitalize on long-term opportunities.
If you have any questions about our strategy or how your portfolio is positioned for the year ahead, please feel free to reach out. Thank you for your continued trust and partnership.
Bill Canty, CFP®, CPA, Financial Planner
Ed Canty, CFP®, Financial Planner
Joe Canty, CFP®, Financial Planner
Tina Alteri, CPA, Tax Advisor
Maureen Walsh, EA, Tax Advisor
