US stocks rose more than 20% for the second consecutive year

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

Despite a sell-off 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 performance in 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 big technology stocks exposed to AI. Shares in chipmaker Nvidia gained 172 percent over the year, while Meta, which also bet heavily on emerging technology, rose 65 percent.

The performance of the S&P 500 contrasted with European markets, with the Stoxx 600 gaining 6 percent and the FTSE 100 rising 5.7 percent. An MSCI index of Asia Pacific shares is up 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’s cuts to interest rates for the first time since the coronavirus pandemic and resilient economic data that reassured investors that the United States is headed for a soft landing. Expectations of tax cuts and tighter 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,” coupled with a potential “AI revolution,” meant the rally could continue into 2025. Although 2024 was undoubtedly “a good year” for the United States. Stock market of the United States, “may be only the beginning”, he said.

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

The difference between the price-to-future ratios in US and European stocks could only be justified if you “believe that the last 10 years (of US technology-led profit growth) can continue, and continue for a long time.” , he added.

Investors also had to scale back their expectations of rate cuts over the coming year. With inflation still above target, forecasts released by the Fed suggesting that interest rates will fall in 2025 by less than previously hoped inflicted the S&P 500’s worst session in four months at beginning of December. That dampened investor exuberance after Trump’s election victory in November, and helped push the index up 2.5 percent in December.

Megacap technology 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 argue that big tech’s profit growth and AI’s potential to boost productivity justify the valuations.

Mike Zigmont, co-head of trading and research at Visdom Investment Group, said that barring a collapse in revenue, the Magnificent Seven will remain very popular in 2025 because of the outsized returns they have delivered in the past. “Investors are just looking for them,” he said.

But its gains have prompted bearish commentators to draw comparisons between today’s top-heavy market and the tech bubble that burst spectacularly at the turn of the millennium.

In contrast to gains in the technology sector, 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 not yet materialized the appetite of investors.

Bouts of volatility briefly interrupted the S&P 500’s otherwise steady rise. In addition to the fall in December, the stocks sold suddenly in early August, with falls extending beyond the technology sector.

However, by early December, wealth 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 fund managers world, which indicated “super-bullish sentiment”. Meanwhile, retail investors’ enthusiasm for stock market gains over the next year had never been higher, according to Deutsche Bank.

However, Citi’s closely watched U.S. economic surprise index has slipped in recent weeks, indicating that economic momentum is trending weaker than expected. Some analysts say the slow growth of the amount of money circulating in the US economy, high Treasury yields and a strong dollar point to a potential economic contraction in 2025.

Investors have sold tech stocks in recent days, while the Russell 2000 index of small-cap stocks has slipped further from its November record. The equal-weighted S&P 500, which gives a 0.2 percent weighting to each constituent, lost 6.6 percent in the past month.

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

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