Quarterly Insights - Q1 2025

As we look back upon 2024, the fourth quarter was action packed with an election, two Federal Reserve meetings, and continued unrest overseas. Despite all the headlines, we received a dramatic showcase of robust US economic growth and outsized market returns.

While the resilient U.S. economy and consumer can be credited with much of the success we’ve seen, AI frenzy dominated the headlines and became the focus of returns. The AI enthusiasm drove tech heavyweights like Apple, Microsoft, and Nvidia into the spotlight. The S&P 500 gained 25%, the Nasdaq soared by 29.60%, and speculative assets like Bitcoin broke records with a 122.49% gain.

As of the end of the year, valuation measurements indicate the price of the S&P 500 to be 21-times an increment of earnings. However, the top 10 stocks represent an unprecedented 40% of the index and have a valuation of 29-times. While these mega-cap tech stocks, affectionately dubbed the 'Magnificent Seven,' continued to shine, diversification is important to maintain. History indicates asset prices tend to revert to their average over long periods of time. We feel that while the Magnificent Seven appear overpriced, the remaining 490 stocks have a valuation of a more modest 18-times earnings¹. This gives us comfort that the lion’s share of the market still has room to grow.

^{1 Valuations from JPMorgan Guide to the Markets, as of 12/31/2024.}

As 2025 unfolds, we find ourselves navigating a new Presidency and Congress, and with that, new economic and tax policy changes.

The Tax Cuts and Jobs Act (TCJA) of 2017 have provisions that were expected to sunset by end of 2025. Beginning in 2026, income tax rates will revert to 2018 brackets, which include the 39.6% rate. The 20% Qualified Business Income Deduction (QBI) deduction for pass-through-business (S-corps, partnerships, sole proprietors) is set to expire while corporate tax rates at 21% were made permanent. The dreaded Estate Tax aka “Death Tax” is also going to revert back to previous levels. The current policy is that a 40% estate tax is assessed on individuals who die with estates larger than $13.99M. In 2026, the same estate tax will now be applied to individuals who die with excess of $7m in net worth (projected) which may affect many more households.

We believe that there will be an extension or modification of the TCJA provisions. As Congress and the President negotiate the final bill this year, we will keep informed of any changes and updates and communicate if any urgent planning in 2025 may be needed.

The Fed has taken an extended pause of interest rate cuts that began in September 2024 as inflation remains elevated above their 2% target and job growth has been relatively consistent. With President Trump promising wide-reaching tariffs across the board during his campaign, economists have warned of the cost of tariffs being passed to the consumer, leading to higher inflation. While pundits and analysts can often be wrong, the Fed has communicated they are taking a wait-and-see approach before making further cuts on interest rates.

With new tariffs now being implemented, changes in government spending, layoffs, and slowing growth expectations, we are experiencing a more volatile and uncertain economic and market environment. We have been through all of this and more over the years. We are ready.

It's an honor to serve you and the people you care about. If you have any questions or concerns or just want to talk, we are here for you.

Maximum Contribution Limits to Retirement Accounts

Traditional IRA / Roth IRA

• $7000 under age 50
• $8000 over age 50

401k / 403(b)

• $23,500 under age 50
• $31,000 over age 50
• If you turn 60, 61, 62, or 63 in 2025 you are eligible for the enhanced catch-up contribution limit of $11,250 for a total contribution of $34,750.

529 Plans can be Rolled Over to Roth IRAs

CalSavers Retirement Savings Program

• For business owners in CA with 1 or more employees. They must register with CalSavers or offer a retirement plan by 12/31/25

Inherited IRAs

In 2025, the IRS will begin enforcing penalties for missed required withdrawals from inherited individual retirement accounts (IRAs). This applies to most non-spouse beneficiaries. 

Key 2025 rules 

• Beneficiaries must take annual required withdrawals (RMDs)
• The entire IRA must be emptied within 10 years
• The 25% penalty for missed RMDs applies
• RMD amounts vary based on age, relationship to the deceased, and account value

How to avoid penalties 

• Beneficiaries should ensure timely withdrawals
• Beneficiaries may consider taking larger-than-required distributions to spread out tax liability
  

Who is affected

• The rule applies to most non-spouse beneficiaries if the original IRA owner reached the required minimum distribution age before death. 

Transitional relief

• The IRS provided transitional relief for beneficiaries who did not take RMDs from their inherited IRAs in 2021 through 2024

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