Investor excitement about artificial intelligence has fueled a big rally in mega-cap tech stocks, with the U.S. S&P 500 index up more than 20% for the second year in a row.
Despite December’s decline, the blue-chip basket ended 2024 up 23.3%, following a 24.2% rise a year earlier, marking its best two-year performance this century. The index has risen more than 20% annually four times in the past six years.
This rally has been led by big tech stocks exposed to AI. Chipmaker Nvidia’s stock is up 172% for the year, while Meta, another big bet on early technology, is up 65%.
The S&P 500’s performance was in contrast to European markets, with the Stoxx 600 up 6% and the FTSE 100 up 5.7%. The MSCI index of Asia-Pacific stocks rose 7.6%.
“The U.S. (market) has rarely been in such an exceptional situation,” said Michael Metcalfe, head of macro strategy at State Global Markets.
Wall Street stocks also rose on the Federal Reserve’s first rate cut since the coronavirus pandemic and resilient economic data that reassured investors that the U.S. is headed for a soft landing. Expectations for tax cuts and deregulation during President Trump’s second term have also fueled the rise in recent months.
Bank of America strategist Benjamin Bowler said the bull market is likely to last until 2025 due to President Trump’s “laissez-faire economy, tax cuts, deregulation” and potential for an “AI revolution.” Ta. The U.S. stock market “might just be at the beginning,” he said.
But “there are quite a few red flags to be a little bit cautious,” said Chris Jeffrey, head of macro at Legal & General Investment Management, a $1.4 trillion fund manager.
The rationalization for the difference in forward price/earnings ratios (P/E) between US and European stocks is that the past decade (of tech-driven US profit growth) can continue into the future, and will continue for an incredibly long time. limited to those who believe that he added.
Investors also had to dial back expectations for rate cuts next year. The S&P 500 index traded at its worst level in four months in early December, with inflation still above target and the Fed’s forecast suggesting that interest rates in 2025 will be lower than previously expected. It became. This dampened investor enthusiasm after Trump won the presidential election in November, and caused the index to fall by 2.5% in December.
Mega-cap tech stocks, including the so-called “Magnificent Seven” (Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia, and Tesla), once again dominated the U.S. market.
Bulls argue that big tech companies’ earnings growth and AI’s productivity-enhancing potential justify valuations.
Mike Zygmont, co-head of trading and research at Vizdom Investment Group, said that barring a collapse in earnings, the Magnificent Seven could still be expensive in 2025 because of its huge profits to date. He said it will remain popular. “Investors are just looking for them,” he says.
But their gains have led bearish commentators to compare today’s top-heavy market with the tech bubble that spectacularly burst at the turn of the millennium.
In contrast to the tech sector’s gains, industrial materials companies are expected to be the worst performers in the S&P 500 in 2024, as a weak Chinese economy and fears of a U.S. recession have yet to materialize investor appetite. It was one of the worst companies.
The volatility outbreak temporarily interrupted the S&P 500 index’s steady rise. In addition to December’s decline, stocks also plummeted in early August, with the decline extending beyond the tech sector.
Nevertheless, as of early December, asset managers’ net long exposure to the S&P 500 was at its highest level in more than 20 years, according to Bank of America’s monthly survey of global fund managers. It is rising, indicating “super bullish sentiment.” Meanwhile, retail investors’ enthusiasm for stock market gains over the coming year is at an all-time high, according to Deutsche Bank.
But the index of U.S. economic surprises that Citi tracks has declined in recent weeks, indicating that economic momentum is trending weaker than expected. Some analysts say sluggish growth in the amount of money in circulation in the U.S. economy, high Treasury yields and a strong dollar all point to a potential economic contraction in 2025.
Investors have been selling off tech stocks in recent days, and the small-cap Russell 2000 index has fallen further from its all-time high in November. The equally weighted S&P 500 index, which gives each constituent a weight of 0.2%, has fallen 6.6% over the past month.
Charlie McElligott, a Nomura strategist, said the concentration of returns in big tech stocks will continue to be a “painful trade” for investment funds that are limited in their ability to own a single stock.
Investors “cannot own enough” of large companies, he added.