By Tim Courtney, Chief Investment Officer
As we begin 2025, three key themes are at the forefront of our discussions: tax policy, market concentration and the financial health of the U.S. consumer. These topics provide a critical lens through which we assess the broader economic landscape and its impact on our portfolios.
Tax Policy: One of the most pressing policy questions for 2025 is the future of the Tax Cuts and Jobs Act of 2017. Set to expire at the end of this year, this legislation introduced significant changes to income and estate tax rules.1 Whether Congress decides to extend, modify or allow these provisions to sunset will have major implications for households and businesses alike.
If extended, it could provide temporary relief from concerns around estate and income tax changes. If it appears the legislation will be allowed to lapse, then tax, income and estate planning strategies in many circumstances may need to be updated before the end of the year. While current expectations lean toward an extension, we will continue to monitor developments closely.
Market Concentration: Investors know that a handful of mega-cap stocks (i.e., the Magnificent Seven) has exerted near total control of market behavior. This has been a defining characteristic of the U.S. equity market over the last few years, and one that has begun distorting the market. These companies account for approximately half of the S&P 500’s performance on both the upside and downside, and 2024 was no different.2
As the market capitalization at the top concentrates further, the rest of the market appears distorted. Today, a company with a market capitalization of $75 billion is technically labeled a mid-cap company, despite most investors readily recognizing them as dominant companies in their markets. More and more companies like FedEx, Colgate and General Motors are now classified as mid cap. Fewer and fewer companies are labeled as large caps, underscoring how concentrated the market has become.3
We are also closely watching regulatory developments that have recently been promoted by both parties. At the same time, we’ll keep an eye on whether these companies can sustain the break-neck growth necessary to justify their valuations.
U.S. Consumer Health: With interest rates significantly higher than in recent years, household debt and default rates are rising, even as overall net worth remains elevated due to strong home and stock valuations.4 Consumer spending, which drives approximately 70% of the U.S. economy, showed resilience throughout 2024, contributing to a 2.8% Gross Domestic Product (GDP) growth rate in the third quarter.5 However, with debt servicing costs increasing and wage growth lagging behind inflation, we will be closely watching for signs of financial stress among households in 2025.
We will continue to monitor these key factors closely as we move further into 2025. If you have any questions about your portfolio or the broader market, please reach out to an Exencial advisor. And we’d love to hear your take on these trends—what stands out to you, and how do you see it impacting your financial goals? Share your thoughts with us!
Sources:
- IRS (data as of 12/10/24) – Tax Cuts and Jobs Act: A comparison for businesses
- Reuters (data as of 12/10/24) – The Magnificent Seven Monitor
- Yahoo! Finance (10/25/24) – What Does Mid-Cap Mean in the Stock Market?
- Federal Reserve Bank of New York (11/13/24) – Household Debt Rose Modestly; Delinquency Rates Remain Elevated
- The Times (10/31/24) – US economy boost as shoppers help to keep the growth coming
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The S&P 500® is widely regarded as the best single gauge of large-cap US equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
