U.S. stocks rose 24% in 2024, marking a second straight year of strong gains, fueled by optimism around technological advancements and a more accommodative Federal Reserve. Meanwhile, stocks outside the U.S. delivered more modest returns. This widening performance gap, which has been building for some time, raises important questions about valuations, market dynamics, and the role of global diversification in a balanced portfolio.
Source: Dimensional Fund Advisors
U.S. Equities: Growth Continues, but at What Price?
U.S. stocks remained the market leader in 2024, with large-cap technology and artificial intelligence companies driving much of the growth. The tech-heavy Nasdaq index climbed nearly 30%, powered by companies like NVIDIA, Microsoft, and Apple.
At the same time, valuations rose well above historical norms. One useful measure of valuation is the price-to-earnings (P/E) ratio, which is calculated by dividing the current share price by estimated future earnings per share and reflects the price investors are willing to pay for $1 of earnings. By year-end, the S&P 500’s forward P/E ratio reached 22, significantly above its long-term average.
While this performance has been exciting to watch, it raises the question: how much future growth is already reflected in today’s prices?
Global Markets: A Case for Patience
While U.S. equities commanded the spotlight, international markets produced mixed results. Developed markets outside the U.S. gained 4.44%, and emerging markets rose 7.09%.
A key difference between US and international stocks is their valuations. International stocks continue to trade at much lower P/E ratios than their U.S. counterparts. The dividend yield difference is also striking, with international stocks paying dividends at roughly two to three times the rate of U.S. stocks.
Historically, valuation gaps like these have often preceded periods of stronger relative performance for non-U.S. markets. However, Europe faces structural challenges, including high debt levels and energy concerns, that weigh on economic growth. Meanwhile, the U.S. benefits from a dynamic corporate sector, world-class innovation, and a thriving venture capital industry.
Regardless, a well-balanced, evidence-based portfolio must include non-U.S. stocks—perhaps now more than ever. The valuation gap reflects that international markets are simply priced differently, and while that may be justified, it also suggests that if U.S. stocks struggle, lower valuations abroad could provide a cushion. That, at its core, is the value of diversification.
Bonds: Higher Yields Despite Rate Cuts
The bond market had its own share of headlines. The Federal Reserve cut rates three times over the course of the year, bringing the federal funds target range down to 4.25%-4.50% as inflation eased. Yet, despite these cuts, long-term Treasury yields moved higher, reflecting concerns about government deficits and fiscal sustainability. As a result, bond investors benefited from higher yields, but price declines offset some of those gains. The Bloomberg U.S. Aggregate Bond Index finished the year up 1.3%. In the end, bonds fulfilled their role by providing income and helping to manage overall portfolio risk, even in the face of interest rate and inflation uncertainty.
A Note on Bitcoin
Bitcoin’s volatility continued in 2024, with prices peaking at $102,700 before ending the year near $93,000. While Bitcoin is sure to generate headlines, it is important to remember that cryptocurrency is a speculative investment at best. It lacks the ability to generate cash flow or produce tangible goods and services, making its value heavily dependent on market sentiment – or what increasingly resembles mania – rather than fundamentals.
The underlying blockchain technology has potential, but a more practical approach is to invest in companies leveraging blockchain to improve supply chains, payment systems, and data security. If you own a broadly diversified portfolio, you already have exposure to these innovations.
The bottom line: Bitcoin’s speculative nature, extreme price swings, and lack of productive output make it more of a high-stakes bet than a reliable investment for funding retirement or other important financial goals.
What You Can Control: A Plan for Long-Term Success
As 2025 begins, it’s a good time to remember that successful investing isn’t about predicting markets—it’s about following a disciplined approach. In a recent column at Kiplinger.com, David Booth of Dimensional Fund Advisors outlined three key principles for investors:
- Follow the Evidence: Decades of research show that markets are efficient, and trying to outguess them often leads to disappointing results. A diversified, evidence-based portfolio allows you to participate in market growth without unnecessary complexity.
- Think Long Term: Compounding takes time and patience. Staying invested through market ups and downs is key to long-term growth.
- Focus on What You Can Control: Rather than reacting to headlines or market predictions, focus on your savings rate, risk tolerance, and time horizon.
Booth reminds us that simplifying your investment approach and trusting evidence-based strategies frees you to focus on what truly matters—your family, passions, and purpose. We couldn’t agree more.
Final Thoughts
The year ahead will bring both opportunities and challenges. While U.S. equities have delivered strong results, their elevated valuations suggest some caution. Meanwhile, international markets—despite their struggles—offer more attractive valuations and important diversification benefits.
In our view, a globally diversified, disciplined investment strategy within a well-designed financial plan remains the best way to navigate uncertainty. Here’s to focusing on what you can control and embracing simplicity and patience in 2025.
Market indices used for reference: U.S. stock market performance is represented by the Russell 3000 Index. Developed international stocks are measured by the MSCI World ex-USA IMI Index (net dividends), while emerging markets are represented by the MSCI Emerging Markets IMI Index (net dividends). U.S. bond market performance is based on the Bloomberg U.S. Aggregate Bond Index, and global bonds (excluding the U.S.) are tracked by the Bloomberg Global Aggregate ex-USD Bond Index (hedged to USD). Global stock market performance is represented by the MSCI All Country World IMI Index (net dividends).