UK Market Commentary
UK equity performance fell in Q4 as several domestically focused sectors struggled against rising long-term bond yields and mounting concerns over the macroeconomic outlook. While long-term bond yields rose globally due to upwardly revised inflation expectations, the UK saw additional pressure from fiscal concerns following the new government’s Autumn Budget. The Budget’s cost increases also appeared to weigh on the labour market. Increases in employer National Insurance contributions and the National Living Wage, set to take effect in April, likely contributed to subdued hiring. November hiring data indicated unusually weak demand for workers ahead of the typically busy Christmas season. Preliminary data from the Office for National Statistics (ONS) revealed that the UK economy contracted in October, marking the second consecutive monthly decline. Additionally, past data revisions showed weaker-than-expected performance since the summer, with Q3 growth revised down to zero from an earlier estimate of 0.1%. Outside domestically focused sectors, internationally diversified and industrially sensitive areas of the UK market also underperformed, reflecting global trends in slowing industrial activity.
US Market Commentary
US equities posted gains in Q4, resulting in a strong year for the S&P 500 index. The market was bolstered by Donald Trump’s victory in the presidential election and the “Red Sweep,” which handed Republicans control of Congress. Investors were optimistic that Trump’s policy agenda—focused on boosting growth, lowering taxes, and reducing regulation—would positively impact the economy. During the quarter, the strongest performing sectors included communication services, information technology, and consumer discretionary, with some of the “Magnificent Seven” stocks delivering robust returns. The weakest sector was materials.
The Federal Reserve (Fed) reduced interest rates by 25 basis points in both November and December. However, the Fed prompted a stock market sell-off in December by lowering expectations for future rate cuts in 2025, citing persistent inflation. The core PCE price index, the Fed’s preferred inflation measure, increased 2.8% year-on-year in November.
The US economy remained resilient, with annualized GDP growth of 3.1% in Q3. Labour market data for Q4 was distorted by strike actions and hurricanes. Non-farm payrolls saw a modest increase of 36,000 in October, followed by a robust 227,000 gain in November.
The technology sector significantly contributed to the S&P 500’s 23% rise in 2024, with companies like Nvidia and Microsoft playing pivotal roles. Analysts predict a 9.6% rise in Q4 earnings for S&P 500 companies, with the tech sector’s outstanding performance setting high expectations.
Eurozone Market Commentary
Eurozone equities declined in Q4 amid growing recession fears. The period was marked by political instability in France and Germany, as well as concerns over trade tensions following Donald Trump’s election win in the US. Weak sectors during the quarter included materials, real estate, and consumer staples. However, industrials recorded gains.
Flash PMI (Purchasing Managers’ Index) data for December showed the eurozone private sector ending the year in contraction. The composite output index rose to 49.5 in December from 48.3 in November, indicating some improvement, as the service sector returned to growth.
The European Central Bank (ECB) cut interest rates by 25 bps in October and December. ECB President Christine Lagarde suggested that further rate cuts may follow in 2025 as the eurozone continues to grapple with tepid growth.
Political turmoil was evident in both Germany and France during the quarter. In Germany, Chancellor Olaf Scholz’s governing coalition collapsed in November following the dismissal of his finance minister, setting the stage for elections in February 2025. In France, Prime Minister Michel Barnier was ousted after losing a no-confidence vote, leaving the country in a political limbo until parliamentary elections can be held in July.