The US S&P 500 index rose more than 20 percent for the second year in a row, as investor excitement about artificial intelligence fueled strong gains in megacap technology stocks.
Despite the sale in December, the basket of blue-chip stocks ended in 2024 to 23.3 percent, following the 24.2 percent gain of the previous year, marking its run of two years of performance this century. The index has now made annual gains of more than 20 percent four times in the past six years.
The rally was led by major technology stocks exposed to AI. Shares in chipmaker Nvidia have gained 172 percent in the year, while Meta, which has bet heavily on nascent technology, is up 65 percent.
The performance of the S & P 500 differed from the European markets, with the Stoxx 600 gaining 6 percent and the FTSE 100 rising 5.7 percent. MSCI's index of Asia Pacific stocks rose 7.6 percent.
“The US (market) is rarely unique,” said Michael Metcalfe, head of senior strategy at Global Markets.
Wall Street stocks were also boosted by the Federal Reserve's cut in interest rates for the first time since the coronavirus pandemic and strong economic data that reassured investors that the US is looking at a soft spot. Expectations of tax cuts and deregulation during Trump's second term have driven gains in recent months.
Bank of America expert Benjamin Bowler said Trump's “laissez-faire economics, tax cuts and deregulation”, and the potential “AI revolution”, meant the rally could 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 were “a few red flags that should make us cautious”.
The difference between the forward price ratio of US and European stocks can only be justified if “you believe that the last 10 years (of US income growth driven by technology) can continue, and run for a very long time,” he added.
Investors have had to dial back their expectations for rate cuts next year. With inflation still above the target, forecasts released by the Fed suggest that the interest rate will fall in 2025 below the worst hope for the S & P 500's worst session in four months at the beginning of December. That dampened investor excitement after Trump's election victory in November, and helped push 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 once again the biggest power in the US market.
Bulls contend that big tech revenue growth and AI's potential to boost productivity justifies speculation.
Mike Zigmont, the head of marketing and research at Wisdom Investment Group, said that, despite the fall in profits, the Magnificent Seven will remain very popular in 2025 because of the huge returns they have brought before. “Investors just want it,” he said.
But their gains have prompted bearish analysts to draw comparisons between today's extremely difficult market and the tech bubble that burst spectacularly at the turn of the millennium.
In contrast to the technology 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 U.S. recession dampened investor interest.
Volatility briefly disrupted the S&P 500's otherwise steady rise. In addition to the fall of December, stocks strongly marketed in early August, with the fall extending beyond the technology sector.
However, in early December the long-term exposure of asset managers to the S&P 500 rose to the highest level in more than 20 years, according to Bank of America's monthly survey of global fund managers, indicating a “bullish sentiment”. Meanwhile, investors' enthusiasm for the stock market next year has not been high, according to Deutsche Bank.
However, Citi's closely watched index of the US economy has slipped in recent weeks, indicating that economic growth is weaker than expected. Some analysts say that slow growth in the amount of money circulating in the US economy, high Treasury yields and a strong dollar all point to a possible recession by 2025.
Investors have gone sold technical stock in recent days, while the Russell 2000 index of small-cap stocks has fallen further from its November record high. The equivalent IS&P 500, which gives 0.2 percent to each index, has given up 6.6 percent in the past month.
The concentration of returns in big tech will remain a “trading pain” for investment funds that can only hold any one stock, said Charlie McElligott, an analyst at Nomura.
Investors “can't afford to own enough” of the big names, he added.