U.S. stocks produced solid gains, despite increased volatility, with the S&P 500 Index reaching new highs shortly before the end of the quarter. The market was supported by steady U.S. economic growth and new stimulus efforts in the eurozone and Japan. Sharply falling oil prices were a positive factor for U.S. consumers and oil-importing nations but contributed to steep declines in energy stocks, as well currencies and assets of major oil-producing and oil-exporting countries.
The Equity Index 500 Fund returned 4.88% in the quarter compared with 4.93% for the S&P 500 Index and 4.85% for the Lipper S&P 500 Funds Index. For the 12 months ended December 31, 2014, the fund returned 13.40% versus 13.69% for the S&P 500 Index and 13.34% for the Lipper S&P 500 Funds Index. The fund's average annual total returns were 13.40%, 15.14%, and 7.41% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2014. The fund's expense ratio was 0.28% as of its fiscal year ended December 31, 2013.
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The Equity Index 500 Fund charges a 0.5%
redemption fee on shares held 90 days or less.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.
The portfolio seeks to provide broad exposure to large-cap U.S. stocks by replicating the structure and performance of the Standard & Poor's 500 Index. Sector performance during the fourth quarter was widely mixed. Energy stocks fared worst, plunging steeply as oil prices declined to a five-year low. Telecommunication services and materials stocks fell to a lesser extent. On the plus side, the utilities sector's double-digit advance significantly outperformed other sectors, as investors favored their attractive dividend yields amid declining long-term interest rates. All other sectors surpassed the broad market, especially consumer-oriented segments, which could benefit from increased consumer spending in response to lower oil and gasoline prices.
While overall inflation has remained tame, T. Rowe Price managers expect that rising wage costs in the U.S. will squeeze record profit margins. Nevertheless, they think the pace of labor cost increases would be manageable, as companies also enjoy modest sales gains. They note that fourth-quarter earnings reports should provide greater clarity on the overall impact on profits of the decline in oil prices, as some firms benefit from increased discretionary spending, particularly on the part of lower-income consumers.