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As we approach the conclusion of 2024, an astonishing trend is unfolding in the United States stock market, poised to deliver one of its most remarkable performances in years.
The S&P 500 Index has surged nearly 27% year-to-date, surpassing last year's increase of approximately 24%. Should this trajectory persist, it would mark the strongest yearly gain for this benchmark since 2019.
Despite some investors maintaining optimism about a year-end rally, it is worth noting that many on Wall Street were not expecting such a buoyant outcome.
At the beginning of the year, Ed Yardeni of Yardeni Research offered one of the most optimistic forecasts for the S&P 500, predicting a 17% rise with a target price of 5,400 points.
Contrasting with Yardeni's view, most strategists on Wall Street expected only about an 8% increase, aiming for a figure around 5,000 points.
Nevertheless, the S&P 500 has impressively established over 50 closing highs this year, compelling analysts to revise their yearly projections upward.
On Monday, the S&P 500 achieved an unprecedented high of 6,047 points.
Several key factors have contributed to this market turnabout, defying the pessimistic expectations of prominent Wall Street forecasters.
The Economy is Thriving
Concerns surrounding a potential economic recession in 2024 have largely been laid to rest as evidence accumulates to indicate a stable economic foundation.
The American economy is demonstrating strength, with GDP growth hovering around the 3% mark, an exceptionally robust labor market, record employment levels, and minimal layoffs reported, coupled with steady retail sales figures.
This vigorous economic climate has translated into a robust growth trajectory for corporate profits, with earnings per share for S&P 500 companies anticipated to set new records this year.
Most notably, inflation rates have been on a steady decline since the beginning of the year, gradually inching closer to the Federal Reserve's long-term target of 2%.
Interest Rates are Falling
Following a period of high inflation in 2022, the Federal Reserve has embarked on a cycle of interest rate cuts.
This marks the first rate reduction cycle since the COVID-19 pandemic began in March 2020.
Throughout this year alone, the Fed has lowered rates by 75 basis points
Analysts widely anticipate an additional 25-point cut during the upcoming policy meeting later this month.
Falling rates tend to stimulate economic activity and usually foster boosts in stock pricesThis environment can enhance corporate profitability while also improving dynamics associated with traditional discounted cash flow valuation models employed on Wall Street.
AI Trading is Heating Up
The AI fever that kicked off in 2023 has shown no signs of slowing as we move further into 2024.
Nvidia's series of impressive earnings releases has propelled its stock, alongside that of other AI-related companies, to unprecedented heightsAnalysts anticipate the momentum will extend through 2025 as Nvidia begins delivery of its next-generation Blackwell GPU chips.
Companies such as RISE Tech, Nvidia, Dell Technologies, and Broadcom have experienced significant stock price increases this year, with gains of 308%, 181%, 63%, and 48%, respectively, solidifying their status as major beneficiaries in the AI landscape.
It’s Not Just AI Stocks Driving the Market
While AI stocks have experienced substantial growth and significantly enhanced the technology sector, 2024 has seen broad participation in the market's upward trajectory.
The most robust performers in 2023 thus far have been financial stocks, soaring by 35%. Utility stocks follow closely, with a 28% increase, and other segments such as industrials and consumer discretionary have advanced by 25% and 22%, respectively.
Additionally, when assessed on an equal weight basis, the S&P 500 has risen by 18%. Unlike 2023, where the majority of gains were concentrated in a handful of stocks, this year exhibits a more balanced growth distribution.
This diversified performance signifies a healthy market, suggesting that the gains of 2024 are sustainable.
What Lies Ahead in 2025?
As we approach next year, Wall Street strategists generally retain an optimistic viewpoint.
While some senior strategists foresee an additional 20% increase in 2025, which would propel the S&P 500 index beyond 7,000 points, others display cautious optimism.
Morgan Stanley, which had been bearish since late 2022, recently shifted its stance, predicting an 8% market increase next year, targeting a price of 6,500 points.
Dubravko Lakos-Bujas, a strategist at Morgan Stanley, noted last week, “The U.S
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