Investing.com – Enthusiasm about artificial intelligence and optimism around the US economic growth trajectory are likely to fuel another strong year for equities on Wall Street in 2025, according to analysts at Capital Economics.
With no end to 2024, the top US benchmarks have all doubled in number each year, with the benchmark in particular seeing its best two-year performance since 1997-1998.
Much of the optimism was bolstered by the Federal Reserve's decision last year to begin cutting interest rates down from multi-year highs.
Policymakers have pointed to continued upward pressure on inflation since it peaked in 2022, although some have reported that the pace of moderation has slowed in recent months. Fed Chairman Jerome Powell said at a press conference last month that while policy is “in the right place,” the central bank will now take a “prudent” approach to further easing.
Elsewhere, increased interest around AI has caused a jump in many stocks exposed to the natural technology. Nvidia (NASDAQ: ) has emerged as the world's biggest gainer in terms of market capitalization in 2024, thanks largely to growing demand for AI-focused chips in a range of industries. The company added more than 2 trillion dollars in market value by 2024, closing the year at 3.28 trillion dollars, giving it the second highest value among listed companies in the world.
The incoming administration of President Donald Trump, and the victories of other Republican candidates in November's crucial elections, have raised hopes that businesses will benefit from a new era of liberal rules and tax cuts. However, uncertainty continues to cloud Trump's plans to roll out tougher tariffs and sweeping deportations — and whether these moves could reignite inflation.
However in a note to clients, analysts at Capital Economics said they think the “excellent” return on US equity in 2024 will “continue in the same direction” this year. They estimate a total return of nearly 20% this year from the index focused on MSCI in the USA and about 10% of the gain from MSCI's World index outside the US.
“That's because we expect the main drivers that have boosted the US stock market over 2024 to continue this year,” the analysts wrote.
Hype around AI is seen as supporting stock prices in large US technology firms, “especially at higher valuations,” while such increases are expected to spread across the stock market, they said.
They added that the US economy should maintain its recent record compared to other major economies, although they said Trump's policies “will be, on net, bad for growth.”
“But that only means we're looking at the US (going) ahead of other developed economies in the next few years by a smaller margin than before Trump's victory,” Capital Economics analysts said.