Growth Stocks Soar in 2024

Hello everybody. My name is Ty Benicke and I’m going to be doing your monthly market update for this month. And I thought for this month it’d be interesting to do kind of a year in review on what happened in 2024. And as most of you know, 2024 in whole was a, most people would say it was a success because large company US stocks, as measured by the S&P 500 index, were up over 25%.

Performance Breakdown

Small company US stocks, as measured by the Russell 2000 index, were up a little over 11%. International stocks as measured by the MSCI IFA, which is sort of like the S&P 500 for developed country international stocks, was up only a little over 4%. They kind of took a dip towards the end of the year. And then bonds actually had a below average year at 1.25%.

The good news is that strong returns in the US stock market for both large and small company US stocks were enough to offset some of the lackluster or below average performance in the other two categories.

Market Growth Analysis

If we were to take this conversation a little bit deeper and peel back the layers of the onion and look at, well, what where did the growth come from within large company US stocks? Because there’s not just one category of those US large company stocks. We’ve got large cap growth, we’ve got large cap value. And you can even break it down a little bit narrower than that. But for today’s conversation, I’ll focus on those two major segments of the large cap space, large cap growth stocks. This last year we’re up a little over 33%.

Large cap value stocks were up a little over 14%. So there was a pretty significant difference in performance on those two categories. And large cap growth stocks would include companies like Nvidia. Nvidia takes most of their earnings and they plow it back into the company to meet the demand of the chips that are selling very quickly on the open market.

And they’re very big into artificial intelligence. The stock’s been doing great. But they’re taking most of those earnings and they’re plowing it back into the company. Now large cap value stocks are traditionally known as being more of your dividend paying companies where they don’t take all of their money and put it back into the company. They paid dividends out to the shareholders.

And there are time horizons where both of those different categories thrive. Last year, large cap growth stocks did very well. And similarly, in the small cap space, you can see that small cap growth stocks were up about 15.2% last year. And small company value stocks were up only 8.1% last year. But so it was definitely in favor of growth stocks over value stocks last year.

Investment Strategy and Outlook

And I always get concerned when there’s a large discrepancy between those two broad categories, growth and value, because it inevitably will eventually flip. And one of the things that we can look at to tell more on this story is something called the PE ratio. So the PE ratio, which stands for price to earnings ratio. To make a long story short, when that number is higher, it means that in the next five years, the growth in that category might be stifled based on what history tells us.

So historically speaking, when we have above average PE ratios, the next five years equals a little bit of a lackluster performance in that specific category. It doesn’t always work that way, but as a general rule, if you were to do a scatter plot and show a five-year return subsequent to high PE ratios, usually those returns are less.

And when we have lower PE ratios, generally the next five years are pretty good for that category on average. Again, it doesn’t always work that way, but as a general rule, it works that way more often than not. And when you look at this, you can see large cap growth stocks currently have a PE ratio of almost 29 compared with value stocks; large cap value stocks are only at 16; and similarly with small cap growth stocks, their PE ratio is very high at just under 40; and small cap value stocks have a much more reasonable PE ratio.

Historical Market Trends

And the last time I can think of in my career where there was a very significant difference between large cap growth stocks and large cap value stocks was back in the late 90s and early 2000s. Many of you remember at that time period that growth stocks, especially technology growth stocks, were doing very, very well.

But of course, when the markets crashed in 2001 and 2002, the value stocks held up much better and their PE ratios were much more reasonable going into that time horizon. So the reason I want to say this is I don’t want to encourage people to chase performance because this will inevitably change at some point. I don’t know if it’s next month, the next six months, next year or three years down the road.

But again, if we look at what history tells us: history tells us that generally speaking, those lower PE ratios mean good things for the long term. When we’re below average for a specific sector and when they’re above average quite a bit for a certain sector, that means that returns will be muted in the not too distant future.

So hopefully this makes sense. I’m trying to encourage everybody to maintain a diversified portfolio. We don’t ignore any category. But here at Burning Wealth Management, as you know, we will allocate assets to categories that we think have a better chance of long-term return and minimize those investments that we think are at more risk. But we don’t ignore any of the categories.

We like to maintain that diversified portfolio but encourage everybody to stay diversified; don’t necessarily chase a category because that category might be getting too rich to be able to sustain good long-term returns in the future. So hopefully you found this helpful. That’s my year in review and my market update for January 2025. And of course, as all of you know, if you do have any questions, you can reach out and ask any one of our financial advisors.

Contact information is up here and I hope you have a great 2025. Thank you.