In the US, the S&P 500 index rose more than 20% for the second straight year as investor excitement about artificial intelligence fueled big gains in megacap technology stocks.
Despite the December sell-off, the basket of blue-chip stocks finished 2024 up 23.3%, up 24.2% the previous year, marking its best two-year performance this century. The index has recorded annual gains of more than 20% four times over the past six years.
This rally was led by large technology stocks with exposure to AI. Shares of chipmaker Nvidia have risen 172% over the past year, while Meta, which has invested heavily in the nascent technology, has also risen 65%.
The performance of the S&P 500 contrasted with 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%.
“USA [market] Rarely has this been an exception,” said Michael Metcalfe, head of macro strategy at State Global Markets.
Wall Street stocks also rose on the Federal Reserve’s interest rate cut for the first time since the coronavirus pandemic and resilient economic data reassuring investors that the U.S. is headed for a soft landing. Expectations of tax cuts and regulatory relief during President Trump’s second term have also fueled the rally in recent months.
Bank of America strategist Benjamin Boler said Trump’s “laissez-faire economics, tax cuts and deregulation” and a potential “AI revolution” will likely keep the rally going into 2025. 2024 was undoubtedly a “good year.” For the U.S. stock market, “this may be just the beginning,” he said.
But “there are quite a few red flags that make us a little more cautious,” said Chris Jeffrey, head of macro at Legal & General Investment Management, a fund manager with $1.4 trillion in assets.
The difference between the forward price-to-earnings ratios of U.S. and European stocks is “the [of tech-driven US earnings growth] “It can go on, and it can go on for an incredibly long time,” he added.
Investors also had to lower their expectations of interest rate cuts next year. With inflation still above target, the Federal Reserve’s forecast that interest rates will fall less in 2025 than previously expected led to the S&P 500’s worst session in four months in early December. This dampened investor enthusiasm following Trump’s election in November and helped push the index down 2.5% in December.
Megacap technology stocks, including the so-called “Magnificent Seven” of Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia and Tesla, are again a dominant force in U.S. markets.
Bulls argue that AI’s potential to drive revenue growth and productivity for the tech giants justifies its valuation.
Mike Zigmont, co-head of trading and research at Visdom Investment Group, said that barring a sales collapse, the Magnificent Seven will remain highly popular in 2025 because of its outsized returns in the past. “Investors just look for them,” he said.
But their rise has led bearish commentators to draw comparisons between today’s top-heavy markets and the tech bubble that burst dramatically at the start of the new millennium.
In contrast to the rise of the technology sector, industrials companies were the worst performers in the S&P 500 in 2024, driven by China’s sluggish economy and fears of a U.S. recession that has yet to materialize in investors’ appetites.
The S&P 500’s steady rise was briefly halted as volatility increased. In addition to December’s decline, stocks tumbled in early August, with the decline extending beyond the technology sector.
Nonetheless, asset managers’ net long-term exposure to the S&P 500 rose to its highest level in more than two decades in early December, signaling “ultra-bullish sentiment,” according to Bank of America’s monthly survey of global fund managers. Meanwhile, retail investors’ enthusiasm for a stock market rally next year has never been higher, according to Deutsche Bank.
However, Citigroup’s U.S. Economic Surprise Index has been falling in recent weeks, suggesting economic momentum may be 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 possible contraction in 2025.
Investors have sold off technology stocks in recent days, and the small-cap Russell 2000 index has fallen further from its November peak. The equal-weighted S&P 500 index, which gives each component a 0.2% weight, is down 6.6% over the past month.
Nomura strategist Charlie McElligott said the concentration of returns in Big Tech would remain a “painful deal” for investment funds, which can only hold a certain amount of certain stocks.
Investors “can’t own enough” big companies, he added.
