It’s fair to say that, as far as US stock indices were concerned, last year ended on a whimper rather than a bang.
Yet overall it was a fine performance for the US majors, which saw the broad-based S&P 500 gain 23% in 2024, following on from a 24% gain in 2023.
This was the first time that the index had recorded 20%-plus advances for two years in succession since the Nineties when it recorded four such back-to-back years (and only narrowly missed it being five) from 1995 to 1998.
So, based on what happened back then, there’s perhaps at least one reason to think that 2025 could turn out to be another bumper year in terms of stock market performance.
It’s also worth noting that it’s been tech/growth stocks that have made the biggest contribution to this performance, in the same way that IT, telecoms, and growth did back twenty-five years ago.
Looking at the NASDAQ 100, which strips out financial corporations, and is highly focused on technology, new industries, and growth, last year was also an impressive one which saw the index jump 25%, so slightly outpacing the S&P 500, also a significant number of tech behemoths, including all the ‘Magnificent Seven’.
But it was 2023 which was, on the face of it, a truly extraordinary year for the NASDAQ.
The index more than doubled, rising 53%, and this while the US Federal Reserve was still tightening monetary policy.
But things have to be put into perspective: It’s worth remembering that the tech giants were at the vanguard of a slump throughout the previous year, one that saw the NASDAQ 100 fall by a third.
2022 was the year when the US Federal Reserve finally began to respond to a spike in inflation, which had not turned out to be as transitory as they had insisted it was.
In an effort to get ahead of the problem, the Fed raised rates by 425 basis points between March and the end of 2022 and continued with an additional 100 basis points in the first half of 2023.
This was arguably less of a headwind for tech stocks than old-school value stocks.
The tech giants were typically awash with cash, with little need to borrow or refinance at higher rates.
But this wasn’t enough to counter increased concerns that the tech sector was viewed as richly valued, if not extremely overvalued.
Springing back to the present we hear similar concerns.
Of course, there are so many differences, including that the Fed finally cut rates in September, beginning with a bumper 50 basis point cut, and following that up with 25 basis points in November and December.
But the prospect for further significant easing this year has fallen substantially.
The December decision was deemed a ‘hawkish rate cut’, and recent strength in US economic data has seen the yield on the US 10-year Treasury note top 4.70%, revisiting highs from back in April and sending the dollar soaring.
None of this is helping US equities, particularly as the sharp rally in bond yields has taken investors by surprise.
If the 10-year continues up towards 5.0%, then that could be a real problem for equities going forward, even if these higher borrowing costs are due to future growth expectations, rather than fears over inflation and high Treasury debt issuance due to record budget deficits.
Alternatively, if yields retreat from current levels, just as they did back in April, say, because the Trump Team does manage to cut spending, then US stock indices could bounce back on a wave of positive investor sentiment.
(David Morrison is a Senior Market Analyst at Trade Nation. Views are his own.)
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