Growth is good. In another banner year for the stock market, large-cap growth funds gained 30% in 2024, with the Magnificent Seven powering the upside.

The large-cap S&P 500 gained 23.31% (25.02% including dividends). It was the second straight year of 20%-plus gains. The two-year haul for the S&P 500? A hefty 53.19% (57.88% with dividends), according to S&P Dow Jones Indices.

Stocks rallied despite headwinds. The yield on the 10-year Treasury note saw a three-quarter point rise to 4.58% despite the start of a Federal Reserve rate cutting cycle. Markets gave back some gains in December when the Fed dialed back its 2025 rate cut expectations to two quarter point cuts, down from four, due to continued strength in the U.S. economy.

Uncertainties Remain For Stock Market

In the new year, investors face fresh uncertainty. It's unclear how President Trump's economic proposals, such as tariffs, tax cuts, deregulation and a crackdown on unauthorized immigrants, will impact markets.

For now though, investors should enjoy the gains of 2023 and 2024.

"2024 was a roaringly good year for stocks," said Edward Yardeni, president of Yardeni Research. "And the past two years were certainly prosperous ones for equity investors."

But the market dominance of AI leader Nvidia (NVDA), Apple (AAPL), Microsoft (MSFT), Tesla (TSLA), Meta (META), Amazon (AMZN) and Alphabet (GOOGL), which accounted for half (53%) of the S&P 500's total return, meant many funds didn't keep pace.

The average U.S. diversified mutual fund gained 17.4% in 2024, lagging the 24.51% return of S&P 500 index funds by more than seven percentage points, according to Lipper Refinitiv data. The top 10 stocks in the S&P 500 now account for a record 37.34% of the index, according to S&P Dow Jones Indices. So, if you didn't own these big stocks for whatever reason, there was no way to keep up with the index.

Bigger Was Better Again

Mutual funds that invest in value stocks and small- and midsize stocks also fell short of the S&P 500 bogey. Large-cap value funds returned 15.66% last year, trailing their large-cap growth counterparts' 29.88% gain. Small-cap value funds returned 9.73%, versus a 14.73% return for small growth funds. Similarly, midcap value funds posted an 11.07% return, trailing midcap growth funds' 15.89% rise.

"If you weren't in the Magnificent Seven or a cap-weighted index (that owns large positions in these stocks), you better have been in bitcoin," said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. Bitcoin, which topped $100,000 in early December, closed 2024 up 120% at $93,414. If you subtract the Magnificent Seven returns from the S&P 500, the index's 2024 total return would shrink from 25.02% to 11.75%, Silverblatt says.

The outperformance of Big Tech names was a big reason why the Nasdaq led the major U.S. indexes in 2024 with a 28.64% gain. The Dow rose 12.88%. The Russell 2000, a small-cap index, posted a 10.02% gain.

Thanks to a year-to-date gain of 171.17%, AI-chip maker Nvidia's market cap ballooned to $3.29 trillion, up nearly threefold from $1.22 trillion at the end of 2023. Only AI software and analytics company Palantir Technologies (PLTR), up 340.48%, and independent power producer Vistra (VST), up 259.92%, outpaced Nvidia.

Standing Out In Stock Market

The top-performing large-cap growth fund last year was Alger Focus Equity (ALZFX), up 55.22%. Co-fund manager Patrick Kelly back in December told IBD that the economy is "in the midst of the most innovative times in history." He expects the pace of innovation will continue to accelerate over the next five to 10 years.

Alger Focus Equity is a big investor in the megatech giants, such as Microsoft, Nvidia, Meta Platforms, Amazon and Apple. But he also likes indirect beneficiaries of the AI buildout, such as independent power players Constellation Energy (CEG), Vistra and Talen Energy (TLN). They are benefiting from AI-driven energy demand. Another AI play in the fund is AppLovin (APP) an advertising tech company best known for using AI to provide targeted ads on mobile games.

The No. 1-performing midcap growth fund last year was Kinetics Paradigm (KNPAX), which gained 88.47%. The fund's top holding is Texas Pacific Land (TPL). The company's location in the Permian Basin is key, as it generates revenue by selling water to fracking companies in the Texas desert. The landowner also is adding land tenants in businesses such as battery farms, wind farms, solar, and bitcoin mining.

Finding Small Winners

Leading the small-cap growth performance derby in 2024 was Calamos Timpani Small Cap Growth (CTSIX), which returned 44.36%. Among the fund's top holdings are FTAI Aviation (FTAI), an aviation engine leasing and maintenance company with a sustainability streak, including carbon offsets. RadNet (RDNT), a radiology firm that runs outpatient diagnostic centers, is another top holding.

The leading science and technology fund was Simplify: Volt Tesla Revolution (TESL), which soared 149.22% in 2024. This fund isn't for the weak of heart as it seeks to make its money investing primarily in Elon Musk-led Tesla (TSLA). In addition to owning shares of Tesla, it also owns a leveraged ETF that invest solely in Tesla with returns that are two times that of the stock itself.

Utilities Light Up The Stock Market

In the sector world, if you think utilities are boring, think again. In the AI age, utility funds that own independent power producers like Constellation Energy and Vistra can post big returns. Case in point: Virtus Reaves Utilities ETF (UTES), which rocketed 45.3% higher last year.

The one downside to all the upside in big disruptive tech companies or stocks benefiting from AI is that asset classes often viewed as diversifiers didn't do their job last year.

Among the largest 25 mutual funds, laggards can be found in the bond market and international stocks. iShares Core MSCI EAFE (IEFA), which invests in developed countries outside the U.S., gained a paltry 3.41% in 2024. And the backup in bond yields despite Fed easing hurt bond funds. iShares Core US Aggregate Bond (AGG), which invests in a diversified basket of investment grade bonds, eked out a 1.37% gain. And Vanguard Total Bond ETF (BND), which invests in all bonds in the U.S., rose 1.34%.

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