US Equities in 2024
The year began with the usual cocktail of inflation fears and recession talk. Equities ignored both. Despite a year of rising Treasury rates, the S&P 500 returned 23.31% on price and 24.88% including dividends. December was the weak spot at -2.50%, but the full-year story was unambiguously strong.
One structural observation worth keeping in mind: most of the return came from price appreciation. Dividend yield has been drifting lower for decades as buybacks have substituted for dividends, which is relevant for anyone using dividend discount models in a mature US equity context.
How Historic Was It?
From 1928 to 2024, the S&P 500 delivered positive returns in 71 of 97 years. At 24.88%, 2024 ranks as the 27th best year on record — strong, but not an outlier. The combined 2023 and 2024 return of 57.42% is more notable: that puts this two-year window among the ten best back-to-back periods in the series.
Equity risk premiums realized in 2024 were substantial: stocks beat 3-month T-bills by roughly 19.91% and 10-year Treasuries by 26.52%. These are ex post realized premiums, not forward-looking implied premiums, but they feed into the backward-looking averages many practitioners still use for cost-of-capital inputs.
Where Pricing Sits Entering 2025
Heading into 2025:
- Aggregated S&P 500 P/E was 24.16 — above the average for every decade since 1970
- The normalized (10-year) P/E and CAPE were similarly elevated
- Earnings yield fell below the 10-year Treasury yield, producing a negative equity risk premium on a simple yield-gap basis
That last point is the one worth sitting with. When earnings yields slip below risk-free rates, the traditional "stocks are cheap relative to bonds" heuristic breaks.
An Intrinsic Valuation Check
Using a DCF with explicit cash flow, reinvestment, and growth assumptions, Damodaran's start-of-2025 implied expected return on the S&P 500 was 8.91%, yielding an implied equity risk premium of 4.33%.
If you believe the normal equity risk premium is closer to 4.5%, the index was approximately 12% overvalued at year-start. That's not a crash signal — it's a return-of-capital-over-capital-appreciation signal for a portfolio context, and a "be careful with terminal-year assumptions" signal for company-level valuation work.
Risks Worth Naming
Damodaran flags three categories of downside:
- Resurgent volatility, particularly if concentration unwinds
- An inflation re-acceleration that forces rates higher
- Geopolitical or economic shocks that compress risk appetite
Implications for Valuation Practitioners
- When market P/Es are elevated, terminal value assumptions do most of the lifting in DCFs — stress-test them
- Current implied ERPs are the more defensible input for forward-looking cost of capital than historical averages
- Backward-looking realized premiums from 2023-2024 will distort long-run averages; consider weighting or excluding
Bottom Line
US equities closed 2024 strong, but on fundamentals-based valuation metrics the index entered 2025 richly priced. Expected forward returns are lower than trailing returns suggest, and valuation practitioners should calibrate cost-of-capital inputs to forward-implied rather than trailing-realized premiums.