From the beginning of 2024 through Dec. 13, the S&P 500 index grew by 27.6%, staying above the psychologically significant threshold of 6,000 points. Over the year, the benchmark exhibited a controversial dynamic, varying between impulsive spikes and local setbacks. The year did not start well for the index, as investors withdrew funds from tech companies and other instruments that had surged in late 2023. Stock prices were also pressured by concerns that expectations for monetary policy softening might be overly optimistic.
The Federal Reserve’s reports and speeches by top executives struck a modestly hawkish tone, emphasizing the need for more time and data to better understand inflationary trends. Before the final session in January, the market surged on the back of strong macroeconomic data, supporting the possibility of the Goldilocks economy scenario.
The escalation of the Fed’s rhetoric after the January meeting led to a local setback, although the bullish trend persisted. In February, the market surged with confidence. Inflation data for January, exceeding consensus expectations, had only a short-term impact on investor sentiment. Positive reports about earnings spurred purchasing activity, with NVIDIA’s (NASDAQ:NVDA) quarterly results becoming one of the most significant market events in February. This fueled a “fear of missing out” (FoMO) effect in the high-tech sector, while the report itself bolstered enthusiasm for the AI narrative.
The rapid growth of NVIDIA’s data centers segment, coupled with the increasing manufacturing capacity of TSMC (a chip manufacturer for NVIDIA), provided broader momentum to chipmakers’ stock prices. Despite investor anxiety over the high-tech rally, positive comments by the Fed chair and signs of a cooling labor market supported consumer sentiment in March. After the price spikes in Q1, nearly all sectors experienced pressure in early Q2.
The key drivers of this decline were profit-taking after a strong start to the year and a shift in expectations regarding the timing of monetary policy softening. These expectations consistently outpaced forecasts. This dynamic contributed to an increase in the Fed’s base rate target in December, which supported U.S. Treasury yields.
In April, the market embraced the higher for longer narrative, suggesting that Federal Reserve rates would remain elevated for an extended period. However, in May, Jerome Powell reassured the bulls by stating there was no scenario for additional rate hikes. Combined with a reduction in quantitative tightening to $25 billion, this provided strong support for stock market participants, reinforcing expectations of a softening monetary policy stance.
By late May, discussions about the need for a broader system of data centers and stable energy capacity gained momentum. Against this backdrop, shares of ETF XLU, which tracks companies in the utilities sector, rose by 9.2% in May.
Between May and June, the market rebounded amid mixed economic signals. On one hand, macroeconomic data indicated strong business activity (e.g., national GDP grew by 2.8% in Q1). On the other hand, labor market normalization trends, such as declining job vacancies and slower wage growth, helped curb inflation. Market participants concluded that the question was not if monetary policy would soften but when.
In Q3, the S&P 500 displayed high volatility driven by several risk factors, including anxiety around the U.S. presidential election campaign. On June 15, Donald Trump, then a Republican presidential candidate, survived an assassination attempt in Pennsylvania. Fortunately, his injury was not serious, and his popularity surged, leaving little chance for his key opponent, Joe Biden.
Additionally, weak labor market data and a sharp decline in carry trade involving the Japanese yen triggered a massive sell-off in the stock market. Despite this, the S&P 500 ended Q3 with growth. A sharp correction in early August followed the unexpected suspension of carry trade transactions, driven by the high leverage of these deals in the American high-tech sector. However, thanks to the relatively small volume of these transactions, the market quickly rebounded.
Bullish momentum was further supported by a market rally, asset turnover, expectations of monetary policy changes, and strong Q2 financial results. Investors closely analyzed the Fed’s September meeting, which resulted in a 50-basis point rate cut.
The minutes of the September Fed meeting revealed discrepancies among voting members, but the majority supported the rate cut. This indicated confidence in the economy and inflation trajectory. In Q4, the market rally extended, with share values rising across all sectors except IT. Small- and medium-cap companies showed the strongest gains, while large-cap firms continued to influence market trends significantly.
Market dynamics also became more stable compared to previous quarters, with NVIDIA (NASDAQ:NVDA) stocks contributing 22.3% and 22.5% to index cap growth since the start of the year and Q4, respectively (as of November 29).
One more positive growth driver was GDP data for Q3, reporting a 2.8% increase year-on-year. Consumer demand for staples grew for the second consecutive quarter, while demand for durable goods reached its highest level since March 2023, signaling increased readiness for cyclic and impulsive purchases.
In November, the Fed cut its base rate by 25 basis points to a range of 4.5%-4.75%, as predicted by Freedom Broker. Jerome Powell confirmed that key trends, including disinflation, would persist. After the Dec. 17-18 meeting, the rate was reduced by another 50 basis points, settling between 4.25% and 4.5%.
Donald Trump’s victory in the presidential election was not as shocking to investors as it had been in 2016. On Nov. 6, following the Fed’s decision, the S&P 500 grew by 2.5%, marking its second-best daily performance since Nov. 30, 2022.
The stock market typically grows before elections, with small corrections afterward. Rare pre-election market declines are often followed by rebounds, as happened this year.
Sectors expected to benefit or suffer from Trump’s proposals displayed notable dynamics. For example, durable goods manufacturers, the financial sector, energy segments and small- and medium-cap companies reported strong growth, driven by anticipated fiscal incentives (see the Forecast section for details). Small- and medium-sized firms may benefit from Trump’s protectionist policies, including higher import tariffs. However, these measures could also trigger a new inflation cycle and lead to further interest rate hikes. Potential outcomes of tighter immigration policies are also expected to be negative.
This article first appeared on GuruFocus.
