US stocks soar more than 20 per cent for second year in a row

The U.S. S&P 500 index rose more than 20 percent for a second straight year, as investor excitement about artificial intelligence fueled strong gains in megacap technology stocks.

Despite the December selloff, the basket of blue-chip stocks ended 2024 up 23.3 percent, marking its best two-year performance this century, after a 24.2 percent gain the previous year. The index has now posted annualized 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 are up 172 percent year-to-date, while Meta, which is also betting on new technologies, is up 65 percent.

The S&P 500’s performance stood out against European markets, with the Stoxx 600 up 6 percent and the FTSE 100 up 5.7 percent. An MSCI index of Asia Pacific stocks rose 7.6 percent

“The United States of America [market] Few have been so exceptional, says Michael Metcalf, head of macro strategy at State Global Markets.

Wall Street stocks were also lifted by the Federal Reserve’s first interest rate cut since the coronavirus pandemic and resilient economic data that reassured investors that the U.S. is headed for a soft landing. Expectations of Trump’s second term in tax cuts and relaxed regulations have also boosted gains in recent months.

Bank of America strategist Benjamin Bowler said a potential “AI revolution” along with Trump’s “laissez-faire economics, tax cuts and deregulation” meant the rally was likely to continue into 2025. Although 2024 was undoubtedly “a good year”. The US stock market, “it may just be the beginning,” he said.

But Chris Jeffrey, head of macro at $1.4tn-in-asset fund manager Legal & General Investment Management, said “there are a number of red flags that should make us a little bit more cautious”.

The difference between forward price-to-earnings ratios in US and European stocks can only be justified if “you believe that the last 10 years [of tech-driven US earnings growth] May continue, and may continue for an awfully long time”, he added.

Investors also had to dial down their rate cut expectations in the coming year. Despite inflation being above the target, the Fed’s published forecast to cut interest rates in 2025 was lower than previously expected, marking the S&P 500’s worst session in four months in early December. That dampened investor euphoria 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 dominant force in the US market.

Bulls contends that big tech’s revenue growth and AI’s productivity-enhancing potential justify the valuation.

Mike Zygmont, co-head of trading and research at Wisdom Investment Group, said that, barring a decline in revenue, the Magnificent Seven will remain extremely popular in 2025 because of the amount of revenue they have generated in the past. “Investors just find them,” he said.

But their gains have prompted bearish commentators to draw comparisons between today’s top-heavy markets 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 U.S. recession have yet to satisfy investor appetite.

Volatility briefly interrupted the S&P 500’s otherwise steady climb. Stocks in addition to the December decline Quick sell off In early August, with declines extending beyond the technology sector.

Even so, asset managers’ net long exposure to the S&P 500 rose to the highest level in more than 20 years in early December, according to Bank of America’s monthly survey of global fund managers, indicating “super-bullish sentiment.” Meanwhile, retail investors’ enthusiasm for stock market gains over the next year has never been higher, according to Deutsche Bank

However, Citi’s closely watched U.S. Economic Surprises Index has slipped in recent weeks, indicating that economic momentum is trending weaker than expected. Some analysts say that slower growth in the amount of money circulating in the U.S. economy, higher Treasury yields and a stronger dollar all point to a possible economic contraction in 2025.

Investors have Sell ​​technology stocks In recent days, the Russell 2000 index of small-cap stocks has slipped further from November’s record high. The equal-weighted S&P 500, which gives each component a 0.2 percent weight, fell 6.6 percent last month.

Charlie McElligott, a strategist at Nomura, said the concentration of returns in big tech will be a “pain trade-off” for investment funds that can only hold so much of any single stock.

Investors “just can’t own enough” of the biggest names, he added.