The US’s S&P 500 index has risen more than 20 per cent for the second year in a row, as investor excitement about artificial intelligence fuels strong gains in megacap technology stocks.
Despite a sell-off in December, the basket of blue-chip stocks has ended 2024 up 23.3 per cent, following a 24.2 per cent gain the previous year, marking its best two-year run of performance this century. The index has now made annual gains of more than 20 per cent four times in the past six years.
The rally has been led by big tech stocks exposed to AI. Shares in chipmaker Nvidia have gained 172 per cent over the year, while Meta, which has also bet heavily on the nascent technology, has risen 65 per cent.
The S&P 500’s performance stands in contrast to European markets, with the Stoxx 600 gaining 6 per cent and the FTSE 100 rising 5.7 per cent. An MSCI index of Asia Pacific stocks is up 7.6 per cent.
“The US [market] has rarely been so exceptional,” said Michael Metcalfe, head of macro strategy at State Global Markets.
Wall Street stocks have also been lifted by the Federal Reserve’s cuts to interest rates for the first time since the coronavirus pandemic and resilient economic data that has reassured investors that the US is heading for a soft landing. Expectations of tax cuts and looser regulation during Trump’s second term have also fuelled gains in recent months.
Bank of America strategist Benjamin Bowler said Trump’s “laissez-faire economics, tax cuts and deregulation”, coupled with a potential “AI revolution”, meant the rally was likely to continue into 2025. Although 2024 was undoubtedly “a good year” for the US stock market, “it may only be the beginning,” he said.
But Chris Jeffrey, head of macro at $1.4tn-in-assets fund manager Legal & General Investment Management, said there are “quite a few red flags that should make us a bit cautious”.
The difference between forward price-to-earnings ratios in US and European stocks could only be justified if “you believe that the last 10 years [of tech-driven US earnings growth] can carry on, and carry on for an awful long time”, he added.
Investors have also had to dial back their expectations of rate cuts over the coming year. With inflation still above target, forecasts released by the Fed suggesting interest rates will fall in 2025 by less than previously hoped inflicted the S&P 500’s worst session in four months in early December. That damped investor exuberance after Trump’s election win in November, and helped push the index down 2.5 per cent in December.
Megacap tech stocks including the so-called “Magnificent Seven” — Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia and Tesla — were again the dominant force in the US market.
Bulls contend that big tech’s earnings growth and AI’s potential to spur productivity justify valuations.
Mike Zigmont, co-head of trading and research at Visdom Investment Group, said that, barring a collapse of revenue, the Magnificent Seven would remain highly popular in 2025 because of the outsized returns they have delivered in the past. “Investors just seek them out,” he said.
But their gains have prompted bearish commentators to draw comparisons between today’s top-heavy market and the tech bubble that burst spectacularly at the turn of the millennium.
In contrast to the tech sector’s gains, industrial materials companies were among the S&P 500’s worst performers in 2024 as China’s struggling economy and fears of a US recession that has yet to materialise dented investors’ appetite.
Bouts of volatility briefly interrupted the S&P 500’s otherwise steady ascent. In addition to December’s fall, stocks sold off sharply in early August, with falls extending beyond the tech sector.
Nevertheless, at the start of December asset managers’ net long exposure to the S&P 500 had risen to the highest level in more than 20 years, according to Bank of America’s monthly survey of global fund managers, indicating “super-bullish sentiment”. Meanwhile, retail investor enthusiasm for stock market gains over the next year had never been higher, according to Deutsche Bank.
However, Citi’s closely watched US economic surprise index has slipped in recent weeks, indicating that economic momentum is trending weaker than expected. Some analysts say that sluggish growth in the amount of money circulating in the US economy, high Treasury yields and a strong dollar all point to a potential economic contraction in 2025.
Investors have sold tech stocks in recent days, while the Russell 2000 index of small-cap stocks has slipped further from its November record high. The equal-weighted S&P 500, which gives a 0.2 per cent weighting to each constituent, has shed 6.6 per cent over the past month.
The concentration of returns in big tech will remain a “pain trade” for investment funds which can only hold so much of any single stock, said Charlie McElligott, a strategist at Nomura.
Investors “just can’t own enough” of the biggest names, he added.
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