The U.S. S&P 500 rose more than 20 percent for a second straight year as investor excitement about artificial intelligence fueled strong gains in megacap tech stocks.
Despite a selloff in December, the basket of blue-chip stocks ended 2024 up 23.3 percent, after a 24.2 percent gain last year, marking its best two-year run of this century. The index has now made annual gains of more than 20 percent four times in the past six years.
The rally has been led by big tech stocks exposed to AI. Shares of chipmaker Nvidia have gained 172 percent for the year, while Meta, which also bet heavily on the nascent technology, is up 65 percent.
The S&P 500’s performance contrasted with European markets, with the Stoxx 600 gaining 6 percent and the FTSE 100 up 5.7 percent. An MSCI index of Asia-Pacific stocks rose 7.6 percent.
“The US (market) has rarely been this exceptional,” said Michael Metcalfe, head of macro strategy at State Global Markets.
Wall Street stocks were also lifted by the Federal Reserve cutting interest rates for the first time since the coronavirus pandemic and resilient economic data that reassured investors that the US is headed for a soft recession. Expectations of tax cuts and looser regulations during Trump’s second term have also fueled gains in recent months.
Bank of America strategist Benjamin Bowler said Trump’s “laissez-faire economics, tax cuts and deregulation,” along with a “potential AI revolution,” meant the rally was likely to continue into 2025. Even While 2024 was clearly “a good year” for the US stock market, “it may just be the beginning,” he said.
But Chris Jeffrey, head of macro at $1.4 trillion in asset fund manager Legal and General Investment Management, said there were “a lot of red flags that should make us a little bit cautious.”
The difference between the price-to-earnings ratios of US and European stocks can only be justified if “you believe that the last 10 years (of US tech-driven earnings growth) can go on and on for a while terribly long”. , he added.
Investors have also had to cancel their expectations of a rate cut over the next year. With inflation still above target, forecasts released by the Fed suggesting interest rates will fall in 2025 by less than previously hoped sparked the S&P 500’s worst session in four months in early December. That dampened investor exuberance after Trump’s election victory in November and helped send the index down 2.5 percent 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 boost productivity justify the valuations.
Mike Zigmont, co-head of trading and research at Wisdom Investment Group, said that, barring an earnings collapse, the Magnificent Seven would remain very popular in 2025 because of the large returns they have delivered in the past. “Investors just look for them,” he said.
But their gains have prompted jaded commentators to draw comparisons between today’s high 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 yet-to-be-materialized U.S. recession dampened investor appetite .
Periods of volatility briefly interrupted the S&P 500’s steady climb. In addition to December’s decline, stocks sold off sharply in early August, with declines extending beyond the technology sector.
By early December, however, 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 “sentiment super- bullish”. Meanwhile, retail investor enthusiasm for stock market gains over the coming year has never been higher, according to Deutsche Bank.
However, Citi’s closely watched index of US economic surprises has fallen in recent weeks, indicating economic momentum is trending weaker than expected. Some analysts say slow growth in the amount of money circulating in the US economy, high Treasury yields and a strong dollar all point to a possible economic contraction in 2025.
Investors have been selling tech stocks in recent days, as the Russell 2000 index of small-cap stocks has fallen further from its November record high. The equal-weighted S&P 500, which gives a 0.2 percent weight to each component, has fallen 6.6 percent over the past month.
Focusing returns on big tech will remain a “pain trade” for investment funds that can only hold so much of any single stock, said Charlie McElligott, a strategist at Nomura.
Investors “simply can’t own enough” of the biggest names, he added.
