How have financial markets performed in 2024?

Financial markets were marked by contrasting dynamics across the major economic regions. In Europe, the equity market gained +6.0%, buoyed at the start of the year by hopes of a cycle of rate cuts and solid earnings releases.

However, the second half of the year was affected by economic, political and geopolitical concerns: the political crises in France and Germany, the election of Donald Trump and his threats of tariffs, the spread of conflicts in Ukraine and the Middle East, and weak Chinese consumption.

In the United States, markets hit record highs, with the S&P 500 at +33.1% and the Nasdaq at +34.3% (in local currency), buoyed by a cycle of rate cuts and robust economic growth (Q2 GDP: +3%, Q3: +3.1%). The election of Donald Trump has boosted optimism, particularly in the technology and financial sectors, due to expectations of deregulation and tax cuts.

What is the outlook for the year ahead?

The outlook remains limited, with Goldman Sachs forecasting an average annual return of 3% in nominal terms over 10 years (1% in real terms). This context calls for strategic diversification, focusing on three major areas.

Firstly, diversification by size offers opportunities in the small and mid-cap (Smid) segment. This segment is more sensitive to falling interest rates, with 49% of Russell 2000 companies having floating-rate debt, compared with just 9% in the S&P 500. In addition, an upturn in M&A activity is expected to favour mid-sized companies. Morgan Stanley anticipates a 50% increase in transactions by 2025, thanks to a soft landing for the economy and pressure from private equity funds.

Secondly, diversification by style can be interesting, particularly by focusing on the value style. The latter benefits from an attractive relative valuation, below the long-term average in the US (one standard deviation below the mean) and even more so in Europe (1.5 standard deviations). The value style is also supported by its correlation with inflation expectations, which rose by 50 basis points in Q4 2024, and by the resilience of local industries, less exposed to trade tensions.

Finally, geographic diversification can balance portfolios. While the United States represents a record allocation for many investors, the eurozone remains underweight despite more attractive valuations. Any improvement in the geopolitical outlook, such as a ceasefire in Ukraine, or in the fiscal outlook, particularly in Germany following the early elections, could reverse capital flows and boost European markets.

Thus, although the high valuations of U.S. markets limit potential gains, a diversification strategy focused on size, style, and geography can unlock interesting opportunities while strengthening portfolio resilience in a particularly uncertain 2025 environment.

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