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

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

Despite December’s selloff, the basket of blue-chip stocks ended 2024 up 23.3 percent, after last year’s 24.2 percent gain, marking its best two-year performance this century.The index has now posted annual gains of more than 20 percent in four of the past six years times.

The rally was led by big tech stocks exposed to AI, with shares of chipmaker Nvidia up 172 percent in the year, while Meta, which has also bet big on the nascent technology, is up 65 percent.

The S&P 500 underperformed European markets, with the Stoxx 600 up 6 percent and the FTSE 100 up 5.7 percent.The MSCI index of Asia Pacific shares rose 7.6 percent.

“U.S [market] has rarely been so exceptional,” said Michael Metcalf, 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 buoyant economic data that reassured investors the U.S. is headed for a soft landing, as are expectations of tax cuts and looser regulations during Trump’s second term have contributed in recent months.

Bank of America strategist Benjamin Bowler said Trump’s “lean economy, tax cuts and deregulation” combined with a potential “AI revolution” means the rally will continue into 2025. Although 2024 is sure to It’s been a “good year” for the US stock market, he said.

But Chris Jeffrey, head of macro at $1.4 trillion asset manager Legal & General Investment Management, said there were “quite a few red flags that should make us a little bit cautious.”

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

Investors have also had to scale back their expectations of a rate cut in the coming year.With inflation still above target, the Fed’s forecasts suggesting that rates will be cut by less in 2025 than previously expected, the S&P 500- , its worst session in four months, dampened investor activity since Trump’s election victory in November and helped push the index lower by 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 U.S. market.

Bulls argue that big tech’s revenue growth and AI’s potential to boost productivity justify valuations.

Mike Zygmont, co-head of trading and research at Wisdom Investment Group, says that, barring a decline in revenue, the Magnificent Seven will remain popular in 2025 because of the strong returns they’ve delivered in the past. “Investors are just looking for them,” he said :

But their gains have prompted bearish commentators to draw comparisons between today’s most bearish 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 U.S. recession that has yet to materialize dampened investor appetite.

Bouts of volatility briefly interrupted an otherwise steady rally in the S&P 500. In addition to December’s fall, stocks sold out sharply in early August, when the declines will exit the tech sector.

However, in early December, asset managers’ net long exposure 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 “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 surprise index has fallen in recent weeks, indicating that economic momentum is trending weaker than expected high yields and a strong dollar point to a potential economic downturn in 2025.

Investors have sold technology stocks In recent days, while the Russell 2000 index of small-cap stocks has fallen further from its record high in November, the equally weighted S&P 500, which gives each component a 0.2 percent weight, has fallen 6.6 percent over the past month.

The concentration of returns in big tech will remain a “pain trade” for investment funds that can only hold so much of any stock, said Nomura strategist Charlie McElligott.

He added that investors “simply can’t get enough” of the biggest names.