2024 Year in Review:
The past year brought the steady supply of news and uncertainty that is expected from an election year and widely divided electorate. While elections are always front and center, 2024 seemed to provide even more than the typical storylines with daily drama that included Joe Biden stepping aside after pressure from his own party and an assassination attempt on Donald Trump.
Added to this was the turmoil overseas as the Israel-Hamas and Russia-Ukraine wars raged on and massive damage inflicted on parts of the Southeast from Hurricanes Helene and Milton.
On the financial side, the Federal Reserve began cutting interest rates in September, and despite the news cycle and major global events, markets have generally performed well throughout the year.
Key Market Highlights: While investment performance has been widely positive for 2024, returns have varied substantially by asset class. US equity, particularly large companies, have led the charge again in 2024 with the large technology companies contributing heavily to this outperformance.
International equity has also experienced positive returns for the year although much less dramatic, followed by bonds which have posted only a marginal return for the year.
While 2024 returns favored US equity (particularly large companies), history has shown that past performance is a poor indicator of future returns. When considering future returns, valuations are extremely important.
Looking at current valuations, the price-to-earnings ratio of the S&P 500 is steep at over 22 times earnings whereas the international equity benchmarks are trading in the range of 12-14 times earnings.
Similar to prior years, the performance and extremely high valuations of US large companies continue to be dominated by the seven largest technology companies – the Magnificent Seven (also known as Mag 7). While the S&P 500 is often thought to be a well-diversified benchmark, its current concentration of over 33% in the Mag 7 would say otherwise:
Further, these Mag 7 companies contributed heavily to the S&P 500’s performance in 2024 as well as its lofty valuations:
With the Mag 7 representing about 1/3 of the S&P 500, the incredible performance of these companies during 2024 had a significant impact on the S&P 500’s total return for the year. To demonstrate the difference, consider the S&P 500 equal weight index represented by Invesco S&P 500® Equal Weight ETF (RSP) where 2024 performance was 12.78%. Still a great year, but far short of the near 24.89% return of the SPDR S&P 500® ETF Trust (SPY).
The question remains, how long can the outperformance of large US technology companies continue, and are investors who are heavily allocated to the S&P 500 taking on unnecessary risk for the years to come?
We believe an approach that manages total exposure to the Mag 7 companies and focuses on cash flows and the underlying fundamentals of each business is key for the years ahead as we previously discussed in our blog post titled The Magnificent Seven and Market Cap Weighted Indexing.
Key Takeaway:
While the S&P 500 had very strong returns in 2024, a large portion of the returns were attributable to its high concentration in the Mag 7 which represent 1/3rd of the S&P 500 index.
Updates For 2025:
With each year comes the standard changes to IRS tax thresholds and contributions limits. For most Americans, these changes require awareness so that they can update their payroll elections and retirement contributions to match the new thresholds.
Employer Plan Contribution Limits: For 2024, 401(k) and 403(b) contribution thresholds have increased with inflation. There are two primary changes. The first is that the employee deferral limit increased from $23,000 to $23,500.
The second is the catch-up contribution for individuals who are age 50 or older at the end of the year. In 2024, the catch-up contribution was $7,500 across the board; however, beginning in 2025, there is a higher catch-up contribution allowed for individuals aged 60-63 of $11,500.
Thus, the changes to contributions limits for 401(k) and 403(b) plans can be summarized as follows:
Traditional IRA and Roth IRA Contribution Limits: Traditional IRA and Roth IRA contribution limits have remained the same for 2025 at $7,000 per individual. Catch-up contributions are allowed for individuals age 50 and over. These catch-up contributions historically were fixed at $1,000, but the SECURE ACT 2.0 changed the law so that they are indexed for inflation going forward. For 2025, the catch-up contribution remains at $1,000 and will gradually increase with inflation in the future.
Health Savings Account Contribution Limits: Health savings accounts (HSAs) available to individuals and families on high deductible health insurance plans continue to be the most tax advantaged account available for saving due to the triple tax benefits of tax-deductible contributions, tax-deferred growth, and tax-free distributions for qualifying medical costs.
For 2025, the contribution limits for HSAs have increased from $4,150 to $4,300 for individuals covered by an individual high deductible health plan and from $8,300 to $8,550 for those covered by a family high deductible health plan. HSAs also provide a $1,000 catch-up contribution for individuals age 55+.
Key Takeaway:
Individuals should review their payroll elections and retirement contributions to ensure they reflect the higher limits allowed for 2025.
Looking Forward to 2025:
Looking forward, 2025 appears to be setting up as a year that may bring significant changes to the legislative landscape.
Currently, 2025 is slated to be the final year of the income and estate tax benefits included in the Tax Cuts and Jobs Act (TCJA) passed at the end of 2017. These provisions, only effective for a set period of time, are scheduled to lapse at the end of 2025.
Some of the major changes that are scheduled to occur as the Tax Cuts and Jobs Act provisions lapse include:
- Tax brackets will increase across the board. Most tax brackets will increase by 2-3%, and some of the tax brackets – particularly for those who file jointly – will compress which results in reaching higher tax brackets more quickly.
- The standard deduction will shrink by nearly half and personal exemptions will return.
- The current child tax credit of $2,000 per child will fall to $1,000 per child and will begin phasing out at $75,000 of adjusted gross income (AGI) for single filers and $110,000 for joint filers versus the current phase out ranges of $200,000 for single filers and $400,000 for joint filers. Additionally, the $500 credit for other dependents will go away.
- The cap on state and local real estate taxes used as an itemized deduction will no longer apply. Additionally, individuals will have more flexibility in deducting interest expenses on larger home mortgage loans and home equity loans.
- Individuals will have the ability to deduct a number of expenses as miscellaneous itemized deductions that have been disallowed under the TCJA including investment advisory fees, tax and legal fees, and unreimbursed employee business expenses.
- The qualified business income deduction which allows small business owners to deduct 20% of their business income will expire.
- The federal estate tax exemption which currently is $13,990,000 per person is set to be cut in half at the end of 2025, resulting in a significant increase in the number of individuals who have taxable estates – a major impact given the top federal estate tax rate of 40%.
While some of the provisions allow for increased deductions, the expiration of the TCJA would result in a general increase in taxes for most taxpayers.
Given the sunset of these provisions was included in the TCJA, these changes will occur absent an act of Congress to pass a new law. Leading up to the 2024 elections, most experts believed extending the tax benefits of the TCJA was unlikely given the high probability of divided government.
Now with the election behind us and Republican control of the House, Senate, and Presidency, it appears likely that we will see major tax legislation during 2025 to address the expiring TCJA provisions.
One of the primary areas experts are watching for proposed legislation is in the area of estate tax thresholds. As discussed in our blog post on protecting your estate from taxes, estate taxes are one of the largest concerns of many wealthy families. With the current estate exemption of $13,990,000, married couples can pass $27,980,000 to heirs without paying any estate tax.
When the TCJA expires and these exemptions are cut in half, many high-net worth families will be significantly impacted. Because of this, many families are undergoing detailed reviews of their estate plans and are preparing to make adjustments while they still have the larger estate exemptions available. With the increased potential for current estate tax exemptions to be extended, it is likely many families will pause any estate plan updates for a few months in hopes of gaining additional clarity.
Key Takeaway:
TCJA is set to expire in 2025 and would result in a general increase in taxes for most taxpayers; however with the recent election results, there is the potential to see major tax legislation during 2025 to address the expiring TCJA provisions.
Putting It All Together:
Looking back over 2024 and considering the likely changes to the legal and tax landscape for 2025, there will be a lot to keep up with when it comes to managing personal wealth.
From ensuring portfolios are strategically positioned in light of the current Mag 7 concentration, to preparing for changes to individual tax laws and estate strategy, having a comprehensive plan for the future is key to navigating the challenges that lie ahead.
Creating the right plan for your family will require a thorough understanding of investment management, tax laws, and estate strategy. In the ever-changing environment we are currently living in, staying up to date requires full-time dedication.
Individuals who choose to manage their own finances need to have three things: the capability, the time, and the desire to manage their own finances. While some do, many are deciding the time required to learn and stay up to date in this rapidly changing environment is not how they’d like to spend their valuable time.
Whether they have the ability to use their talents in their profession where the extra hours will generate significant additional income or they simply want to be spending more time with children and grandchildren while they still can, the trend of individuals seeking financial advice has grown.
For those seeking quality financial advice, we always recommend seeking out a fiduciary, fee-only, and independent financial professional.
Fiduciary: Fiduciary advisors are legally obligated to do what is in your best interest – a standard that, surprisingly, not all financial professionals are held to. When talking to a fiduciary advisor, it is also important to understand whether they are a fiduciary 100% of the time. Some advisors are dually registered which means only a portion of their activities require them to act as fiduciaries.
Fee-only: Fee-only advisors do not receive commission-based compensation from selling products. Instead, they are paid for giving advice. Most individuals who go to a car dealership are aware that the car salesman’s incentive is to sell them a car. Unfortunately, many individuals work with “financial advisors” who have similar incentives to sell the products of the financial institutions they represent. While their title may be “financial advisor,” their primary focus is on selling products rather than providing comprehensive financial advice.
We recommend working with a fee-only financial advisor who has eliminated this conflict of interest by avoiding all commission-based compensation.
Independent: Finally, it is important to find an independent financial advisor. Rather than working with an advisor who represents a larger firm and is restricted to recommending that company’s products, we suggest working with an advisor who is fully independent and has the freedom to recommend whichever solution is best for you.
As more and more individuals are seeking quality guidance to navigate the increasing complexities of personal financial decisions, a fiduciary, fee-only, independent financial advisor can be a guide to help you chart a course through the uncertainties and achieve your own unique dreams.
Key Takeaway:
For those seeking quality financial advice amidst the changing legal and tax landscape in 2025, we recommend working with a fiduciary, fee-only, and independent advisor.
Conclusion:
This past year provided many captivating stories and events that continue to impact the global scene. US businesses generally performed well throughout 2024 with significant concentration and high valuations remaining in the Magnificent 7 companies.
While individuals should consider their exposure to these high valuations, they should also make sure to review any changes to their retirement contribution limits and ensure they are taking full advantage of the tax benefits available. Individuals turning age 50 or 60 in 2025 should particularly review the additional catch-up benefits allowed for employer retirement plans.
Looking forward, 2025 is slated to be a year of significant discussion around tax legislation where lawmakers debate the December 31, 2025, scheduled expiration of many important individual, business, and estate tax provisions.
With the significant complexity brought about by continuing changes in the personal financial planning landscape, many individuals will likely decide that seeking out quality advice is important to ensure they are prepared for the years ahead.
For families who would like to ensure they are taking advantage of the opportunities currently available as well as ensure they are prepared for the future, our fiduciary, fee-only, independent Family CFOs would love to connect to see if what we do is right for you.
