Global equity markets were mostly negative outside the U.S. in the fourth quarter. Many major U.S. stock indexes produced positive returns, and the broad S&P 500 Index capped a second consecutive year of strong gains. Equities rose in the aftermath of the U.S. elections on November 5, which featured former President Donald Trump winning the presidential election, as well as Republican victories in House of Representatives and Senate races, giving them majorities in both chambers of Congress. Investors also welcomed looser monetary policy. The Federal Reserve reduced the federal funds target rate range by 25 basis points on November 7 and on December 18. However, the equity market surrendered much of its post-election gains as longer-term U.S. Treasury yields moved higher as inflation concerns increased. European equity markets and developed Asian markets were mostly negative in dollar terms, including Hong Kong and Japanese shares. South Korean stocks tumbled amid late-year political turmoil after President Yoon Suk Yeol, who was facing impeachment over scandals, declared martial law. The legislature quickly voted to lift the declaration, and Yoon was impeached and suspended from his presidential duties. However, the new acting president was also subsequently impeached. The Chinese stock market fell following economic stimulus measures in the third quarter, as did the Chinese A shares market.
Global fixed income markets were broadly negative in the fourth quarter. Three- and six-month U.S. Treasury bill yields declined in anticipation of the Federal Reserve’s two interest rate cuts. Intermediate- and long-term U.S. Treasury yields increased, however, amid expectations for fewer interest rate cuts in 2025 due to inflation remaining above the Fed’s 2% long-term goal. In the investment-grade universe, sector performance was broadly negative. High yield corporate bonds produced slight positive returns and strongly outperformed the investment-grade bond market. In dollar terms, bonds in developed non-U.S. markets declined due to falling bond prices and weaker non-U.S. currencies. In Europe, where governments in France and Germany dissolved, long-term government bond yields in various eurozone countries and the UK increased in sympathy with long-term U.S. Treasury yields, even though the European Central Bank (ECB) reduced its key interest rate in October and in December. The ECB has reduced short-term rates four times since June. In the UK, the Bank of England reduced its key interest rate by 25 basis points in November; it was the second reduction since August. In Japan, the central bank held short-term rates steady, having increased them twice earlier in the year, but long-term government bond yields increased amid growing expectations that the central bank would raise rates again in early 2025.
Benchmark Performance
EQUITIES
QTD (%)
YTD (%)
Domestic Stocks – All Cap
Russell 3000 Index
2.63
23.81
Domestic Stocks – Large Cap
Russell 1000 Index
2.75
24.51
International Stocks – Developed and Emerging Markets MSCI All Country World Index ex USA Net
-7.60
5.53
International Stocks – Developed Markets MSCI EAFE Index Net
-8.11
3.82
FIXED INCOME
Domestic Bonds – Investment Grade Bloomberg U.S. Aggregate Bond Index
-3.06
1.25
Domestic Bonds – Short-Term Investment Grade Bloomberg U.S. 1–5 Year Treasury TIPS Index
-0.49
4.38
Domestic Bonds – Ultra Short-Term Investment Grade FTSE 3-Month Treasury Bill Index
1.23
5.45
ASSET ALLOCATION POSITIONING
We remain overweight in equities, as we see potential for earnings growth broadening as the impact of central bank cuts flows through to the global economy, although earnings expectations are already lofty, and valuations are stretched. Within fixed income, we maintain an overweight to cash relative to bonds. We feel cash yields remain attractive, especially with fewer rate cuts expected and offers liquidity should market opportunities arise.
Within equities, we are neutral between U.S. and international equities. Within the U.S., pro-growth policies, including trends towards greater deregulation and the extension of tax cuts, are expected to stimulate broader economic activity. Innovation remains a key differentiator, although valuations are elevated. We believe valuations for international equities are attractive on a relative basis, and dividend yields are compelling. Easing central bank policies and the Chinese stimulus could provide incremental support, but geopolitical and trade policy uncertainty pose challenges. Within international markets, we remain overweight to emerging markets stocks. In our view, valuations are attractive and supported by stronger economic growth expectations than developed global markets. Further stimulus is expected from China; however, the timing and ultimate impact remains unclear.
In the U.S., we are underweight to growth versus value equities. Deregulation and a steeper yield curve are likely to be supportive of rate and cyclically sensitive sectors and could lead to broadening of earnings. Meanwhile, growth could be challenged by decelerating earnings. We remain neutral to U.S. small-cap stocks relative to larger companies. Small-caps could benefit from deregulation, stronger merger and acquisition activity, and an accelerating domestic economic growth. However, a higher-for-longer rate environment will be a challenge. We are overweight to inflation-sensitive real assets equities. Commodity-related equities offer support against a resurgence in inflation. Peaking benefits from productivity advancements could ultimately lead to higher oil prices, while some industrial metals could see increased demand from artificial intelligence (AI) spending and decarbonization.
Within fixed income, we remain overweight to high yield bonds. Despite historically tight spreads, fundamentals remain supportive, and default expectations are expected to remain contained. We are neutral to long-term U.S. Treasury bonds as longer-term yields remain vulnerable to a better growth outlook, possible stickier inflation, and increased uncertainty around the fiscal outlook. We are overweight to dollar-denominated emerging market bonds as sovereign valuations are relatively attractive. We see a constructive backdrop with several central banks easing; however, trade policy and the path of the U.S. dollar add uncertainty. We are neutral to inflation-linked securities. The sector offers a hedge should inflation remain sticky or surprise higher and could hedge against the risk for any escalation in geopolitics or impacts from inflationary policies. We are broadly neutral to U.S. dollar-hedged international bonds. Global central bank policies are expected to diverge across regions. Yields remain attractive on a hedged basis as the dollar has strengthened.
OUTLOOK
Global equity and fixed income markets reversed course from recent periods and generally declined during the fourth quarter. Rising geopolitical tensions, including the collapse of Germany’s three-party coalition and the dissolution of France’s minority government, along with uncertainty about monetary policies, economic growth, and the looming prospect of trade wars weighed on many markets. However, equity markets were much more positive in the U.S., where optimism surrounding artificial intelligence and interest rate cuts from the Fed—now in the 4.25% to 4.50% range—boosted sentiment. The results of the U.S. election also bolstered sentiment as the incoming administration’s pro-growth policies are expected to boost the domestic economy. However, we think caution is warranted given potential headwinds from U.S. trade policies and a stronger dollar, particularly with valuations and earnings growth expectations both elevated. There is a great deal of uncertainty around monetary policy, which could drive further volatility in interest rates.
Even amid these potential headwinds, the macroeconomic environment remains favorable, in our view. Constructive corporate fundamentals, historically low unemployment rates, and a positively sloped yield curve all suggest to us the potential for broadening market participation. Our positioning reflects optimism for an improving economic environment, supported by recent tailwinds from Fed rate cuts and favorable inflation readings. While currency and interest rate markets have responded to the prospect of an interest rate pause from the Fed and new tariffs imposed by the incoming Trump administration, it is not clear that these impacts have been fully priced in. Key risks to global markets include monetary policy missteps, reacceleration of inflation, elevated valuations, political uncertainty, and heightened geopolitical conflicts. We continue to assess the overall macroeconomic landscape and potential risks as we evaluate compelling opportunities heading into 2025.
The views expressed are as of the indicated date, are subject to change without notice, and may differ from those of other T. Rowe Price associates. Information and opinions are derived from proprietary and nonproprietary sources deemed to be reliable; the accuracy of those sources is not guaranteed. This material does not constitute a distribution, offer, invitation, recommendation, or solicitation to sell or buy any securities; it does not constitute investment advice and should not be relied upon as such. Past performance does not guarantee future results. Diversification cannot assure a profit or protect against loss in a declining market. Review index definitions. An investor cannot invest directly in an index. Visit our glossary for a list of financial terms and their definitions.
MARKET RECAP
U.S. Election Has Mixed Effect on Global Markets
Global equity markets were mostly negative outside the U.S. in the fourth quarter. Many major U.S. stock indexes produced positive returns, and the broad S&P 500 Index capped a second consecutive year of strong gains. Equities rose in the aftermath of the U.S. elections on November 5, which featured former President Donald Trump winning the presidential election, as well as Republican victories in House of Representatives and Senate races, giving them majorities in both chambers of Congress. Investors also welcomed looser monetary policy. The Federal Reserve reduced the federal funds target rate range by 25 basis points on November 7 and on December 18. However, the equity market surrendered much of its post-election gains as longer-term U.S. Treasury yields moved higher as inflation concerns increased. European equity markets and developed Asian markets were mostly negative in dollar terms, including Hong Kong and Japanese shares. South Korean stocks tumbled amid late-year political turmoil after President Yoon Suk Yeol, who was facing impeachment over scandals, declared martial law. The legislature quickly voted to lift the declaration, and Yoon was impeached and suspended from his presidential duties. However, the new acting president was also subsequently impeached. The Chinese stock market fell following economic stimulus measures in the third quarter, as did the Chinese A shares market.
Global fixed income markets were broadly negative in the fourth quarter. Three- and six-month U.S. Treasury bill yields declined in anticipation of the Federal Reserve’s two interest rate cuts. Intermediate- and long-term U.S. Treasury yields increased, however, amid expectations for fewer interest rate cuts in 2025 due to inflation remaining above the Fed’s 2% long-term goal. In the investment-grade universe, sector performance was broadly negative. High yield corporate bonds produced slight positive returns and strongly outperformed the investment-grade bond market. In dollar terms, bonds in developed non-U.S. markets declined due to falling bond prices and weaker non-U.S. currencies. In Europe, where governments in France and Germany dissolved, long-term government bond yields in various eurozone countries and the UK increased in sympathy with long-term U.S. Treasury yields, even though the European Central Bank (ECB) reduced its key interest rate in October and in December. The ECB has reduced short-term rates four times since June. In the UK, the Bank of England reduced its key interest rate by 25 basis points in November; it was the second reduction since August. In Japan, the central bank held short-term rates steady, having increased them twice earlier in the year, but long-term government bond yields increased amid growing expectations that the central bank would raise rates again in early 2025.
Benchmark Performance
Russell 3000 Index
Russell 1000 Index
MSCI All Country World Index ex USA Net
MSCI EAFE Index Net
Bloomberg U.S. Aggregate Bond Index
Bloomberg U.S. 1–5 Year Treasury TIPS Index
FTSE 3-Month Treasury Bill Index
ASSET ALLOCATION POSITIONING
We remain overweight in equities, as we see potential for earnings growth broadening as the impact of central bank cuts flows through to the global economy, although earnings expectations are already lofty, and valuations are stretched. Within fixed income, we maintain an overweight to cash relative to bonds. We feel cash yields remain attractive, especially with fewer rate cuts expected and offers liquidity should market opportunities arise.
Within equities, we are neutral between U.S. and international equities. Within the U.S., pro-growth policies, including trends towards greater deregulation and the extension of tax cuts, are expected to stimulate broader economic activity. Innovation remains a key differentiator, although valuations are elevated. We believe valuations for international equities are attractive on a relative basis, and dividend yields are compelling. Easing central bank policies and the Chinese stimulus could provide incremental support, but geopolitical and trade policy uncertainty pose challenges. Within international markets, we remain overweight to emerging markets stocks. In our view, valuations are attractive and supported by stronger economic growth expectations than developed global markets. Further stimulus is expected from China; however, the timing and ultimate impact remains unclear.
In the U.S., we are underweight to growth versus value equities. Deregulation and a steeper yield curve are likely to be supportive of rate and cyclically sensitive sectors and could lead to broadening of earnings. Meanwhile, growth could be challenged by decelerating earnings. We remain neutral to U.S. small-cap stocks relative to larger companies. Small-caps could benefit from deregulation, stronger merger and acquisition activity, and an accelerating domestic economic growth. However, a higher-for-longer rate environment will be a challenge. We are overweight to inflation-sensitive real assets equities. Commodity-related equities offer support against a resurgence in inflation. Peaking benefits from productivity advancements could ultimately lead to higher oil prices, while some industrial metals could see increased demand from artificial intelligence (AI) spending and decarbonization.
Within fixed income, we remain overweight to high yield bonds. Despite historically tight spreads, fundamentals remain supportive, and default expectations are expected to remain contained. We are neutral to long-term U.S. Treasury bonds as longer-term yields remain vulnerable to a better growth outlook, possible stickier inflation, and increased uncertainty around the fiscal outlook. We are overweight to dollar-denominated emerging market bonds as sovereign valuations are relatively attractive. We see a constructive backdrop with several central banks easing; however, trade policy and the path of the U.S. dollar add uncertainty. We are neutral to inflation-linked securities. The sector offers a hedge should inflation remain sticky or surprise higher and could hedge against the risk for any escalation in geopolitics or impacts from inflationary policies. We are broadly neutral to U.S. dollar-hedged international bonds. Global central bank policies are expected to diverge across regions. Yields remain attractive on a hedged basis as the dollar has strengthened.
OUTLOOK
Global equity and fixed income markets reversed course from recent periods and generally declined during the fourth quarter. Rising geopolitical tensions, including the collapse of Germany’s three-party coalition and the dissolution of France’s minority government, along with uncertainty about monetary policies, economic growth, and the looming prospect of trade wars weighed on many markets. However, equity markets were much more positive in the U.S., where optimism surrounding artificial intelligence and interest rate cuts from the Fed—now in the 4.25% to 4.50% range—boosted sentiment. The results of the U.S. election also bolstered sentiment as the incoming administration’s pro-growth policies are expected to boost the domestic economy. However, we think caution is warranted given potential headwinds from U.S. trade policies and a stronger dollar, particularly with valuations and earnings growth expectations both elevated. There is a great deal of uncertainty around monetary policy, which could drive further volatility in interest rates.
Even amid these potential headwinds, the macroeconomic environment remains favorable, in our view. Constructive corporate fundamentals, historically low unemployment rates, and a positively sloped yield curve all suggest to us the potential for broadening market participation. Our positioning reflects optimism for an improving economic environment, supported by recent tailwinds from Fed rate cuts and favorable inflation readings. While currency and interest rate markets have responded to the prospect of an interest rate pause from the Fed and new tariffs imposed by the incoming Trump administration, it is not clear that these impacts have been fully priced in. Key risks to global markets include monetary policy missteps, reacceleration of inflation, elevated valuations, political uncertainty, and heightened geopolitical conflicts. We continue to assess the overall macroeconomic landscape and potential risks as we evaluate compelling opportunities heading into 2025.
The views expressed are as of the indicated date, are subject to change without notice, and may differ from those of other T. Rowe Price associates. Information and opinions are derived from proprietary and nonproprietary sources deemed to be reliable; the accuracy of those sources is not guaranteed. This material does not constitute a distribution, offer, invitation, recommendation, or solicitation to sell or buy any securities; it does not constitute investment advice and should not be relied upon as such. Past performance does not guarantee future results. Diversification cannot assure a profit or protect against loss in a declining market. Review index definitions. An investor cannot invest directly in an index. Visit our glossary for a list of financial terms and their definitions.
202501-4167093