Q4 2024
Key Takeaways: Cutting Through the Market Hype:
Big Tech’s Heavyweight Status: Tech dominates the S&P 500, but valuations are stretched—diversification is key.
Small Caps Showing Life: Early signs of a rebound could create opportunities if rates decline and M&A activity increases.
Housing Market Gridlock: High mortgage rates and tight supply keep affordability low, limiting near-term real estate upside.
AI Hype vs. Reality: Massive investment continues, but profitability remains elusive—hype doesn’t guarantee long-term returns.
Few years have tested investors like 2024—defined by soaring tech valuations, AI mania, and a divided housing market. From extreme tech concentration and election uncertainty to housing gridlock and the AI boom, investors faced a landscape both exhilarating and precarious.
But if there’s one lesson to take into 2025, it’s this: perspective and discipline matter more than ever.
Let’s break down the key themes that shaped 2024—and what they could mean for the year ahead.
1. The S&P 500: A Tech Fund in Disguise?
One of the greatest lessons I’ve learned in nearly 20 years as a professional investor is that risk is what you don’t see coming. Major market shocks don’t occur because everyone anticipates them—they happen because the unexpected is what does the most damage.
When investors talk about the U.S. stock market, they often refer to the S&P 500 as if it’s a static entity. But in reality, the index is constantly evolving. Its composition shifts over time, sometimes in ways that create hidden risks beneath the surface.
A great example of this was during the 2020 market decline, when global markets fell nearly 30% due to the COVID-19 crisis. Many investors panicked at the sudden economic shutdown. However, when I took a step back, I noticed something critical:
At that time, ~30% of the S&P 500 was weighted in technology—a sector that would actually benefit from the pandemic-driven surge in digital adoption.
Companies providing cloud computing, e-commerce, and remote work solutions were poised to thrive, despite the broader market turmoil.
While fear dominated headlines, a deeper analysis revealed opportunity beneath the chaos.
Fast forward to the end of 2024, and the market’s composition has only become more concentrated in technology. Today, tech stocks make up nearly 40% of the S&P 500, with the top seven companies (all in tech) accounting for their largest share of the index since 1980.
While these companies have delivered exceptional returns, this growing concentration presents two key concerns:
Tech valuations are near historical highs, rivaling levels seen during the late 1990s tech bubble.
The rest of the market has lagged, with many sectors delivering average or below-average returns.
This is a classic reminder that diversification matters—especially when the crowd is piling into the same investments. History shows us that today’s market leaders rarely remain dominant forever.
A personal example comes to mind:
In the early 1990s, when I first began learning about investing, my grandfather, Julius, the namesake of this firm, was a huge fan of GE—one of the largest and most admired companies at the time.
Back then, GE was the second-largest company in the S&P 500.
Today? It barely makes the top 50.
As we move into 2025, staying balanced and prepared for the unexpected is more important than ever. The S&P 500 is more concentrated in tech than ever. While these companies have delivered strong returns, investors should avoid overexposure and focus on balanced diversification—because history shows market leadership always changes.
2. Small Caps: Early Signs of a Rebound
After spending much of the past decade in the shadow of their larger counterparts, small-cap stocks (as measured by the Russell 2000) have struggled, underperforming in 8 of the past 10 years by a cumulative total of ~130%. However, as we closed out Q4 2024, there were signs of a potential shift.
Following the elections, small caps staged an impressive rally—at one point surging nearly 11%. While some of this momentum cooled, the broader setup remains increasingly constructive for small-cap equities.
Why Small Caps May Be Poised for a Comeback
Several factors suggest that small-cap stocks could regain ground in 2025:
Attractive Valuations – After years of underperformance, small caps are trading at compelling historical discounts relative to large-cap stocks.
A More Business-Friendly U.S. Environment – Policy shifts following the elections may create tailwinds for smaller businesses, particularly those more sensitive to regulatory and tax changes.
Potential M&A Activity – Larger firms flush with cash may look to acquire smaller, undervalued companies, driving up small-cap valuations.
Lower Interest Rates on the Horizon? – If the Fed continues to cut rates, small-cap companies—many of which are more debt-sensitive—could benefit from lower borrowing costs.
Historically, small-cap stocks have delivered strong long-term growth, especially when bought at reasonable valuations. While they come with more volatility, they offer diversification benefits and the potential for outsized returns—making them a valuable counterbalance to the increasingly concentrated, mega-cap-dominated S&P 500.
As 2025 unfolds, keeping an eye on interest rate trends, policy changes, and market sentiment will be key in determining whether small caps can finally break out of their long period of underperformance. For investors with a long-term perspective, this could be an area of opportunity.
3. Frozen Housing: High Costs, Low Supply, and No Easy Fix
The U.S. housing market remained a puzzle in 2024, caught between rising mortgage rates, low inventory, and affordability challenges.
Despite the Federal Reserve cutting interest rates by 1%, mortgage rates climbed nearly 1%, reinforcing the reality that the Fed only controls short-term rates, while long-term mortgage rates are driven by broader market forces.
A Stalemate Between Buyers and Sellers
Housing inventory remained historically low, creating a market gridlock. Many homeowners, locked into ultra-low mortgage rates, were reluctant to sell, while buyers faced some of the worst affordability conditions in decades.
Key factors shaping the market:
Affordability remains near record lows, making homeownership increasingly difficult.
Forty percent of U.S. homes are mortgage-free, insulating many homeowners from rising rates.
More than 50% of mortgage holders are locked in at rates of 4% or below, discouraging home sales.
Household equity in real estate reached a record-high 73% of total housing value, keeping many homeowners in a strong financial position.
These dynamics have created a market that feels stuck—with demand cooling due to high rates but supply remaining tight.
As we enter 2025, housing affordability and supply constraints are unlikely to improve meaningfully. I continue to believe that outsized returns in real estate will be difficult to achieve for the foreseeable future.
For prospective buyers, patience may be key—renting could remain the more practical option until affordability conditions shift. For investors, focusing on cash-flowing properties rather than speculative price appreciation may be the best approach.
4. AI Mania: Innovation AND the Next Big Bubble?
Artificial intelligence dominated headlines in 2024, driving innovation, speculation, and plenty of debate. Tech leaders and investors alike scrambled to stake their claims in what many believe to be the most transformative technology since the internet.
But here’s the question: Does all the hype translate to sustainable profitability? Because at the end of the day, no matter how revolutionary a technology may seem, a business needs to make money to be worthwhile.
Breaking Down the AI Craze by the Numbers
The sheer amount of money flowing into AI is staggering:
$557 billion in cumulative AI infrastructure spending from 2023 to projected 2025.
OpenAI, one of the leading players in the space, is expected to generate only $11.6 billion in revenue in 2025—while still operating at a loss.
Despite the enormous investment, AI companies as a whole have yet to demonstrate a clear path to sustainable profitability, with spending far outpacing realized revenues.
Despite its transformative potential, the AI boom feels eerily familiar to past technological revolutions where early pioneers didn’t always emerge as long-term winners. As Salesforce CEO Marc Benioff wisely put it:
“This is kind of classic in our industry. The pioneers are not the ones who end up being the victors.”
This pattern has played out time and time again:
Yahoo was the first major search engine, but Google became the dominant force.
AOL/Time Warner tried to revolutionize home entertainment, but Netflix won the streaming war.
Nokia & BlackBerry led early in mobile phones, yet Apple redefined the industry.
MySpace pioneered social media, but Facebook emerged as the true giant.
Lessons from History: Hype vs. Sustainable Growth
While AI will reshape industries, investors should remember that high valuations leave little room for error. As history has shown, early frontrunners don’t always remain on top, and speculative markets tend to price in success before it’s achieved.
AI will change the world—but not every AI investment will be a winner. The market is pricing in success before it’s proven. Investors should focus on companies with real profitability, not just big promises.
Looking Ahead to 2025
As we prepare for a new year, it’s worth reflecting on the lessons 2024 taught us. Concentration risk, housing challenges, and speculative bubbles remind us why discipline, diversification, and long-term focus are essential to investing success. At Julius Wealth Advisors, our mission is to help you build a strategy that not only withstands the ups and downs but also allows you to pursue your goals with confidence. After all, building wealth by choice not chance.
Markets will always be unpredictable, but smart investors stay disciplined, diversified, and patient. As we enter 2025, let’s focus on what truly builds wealth—strategy, not speculation.
Truly yours,
Jason Blumstein, CFA
CEO & Founder
Julius Wealth Advisors, LLC
Let’s Connect and Stay Disciplined
Markets will always be unpredictable—but your strategy doesn’t have to be. As we move into 2025, staying diversified, disciplined, and focused on long-term fundamentals will be critical in navigating risks and capturing opportunities.
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