The last trading day of the year has provided a moment for reflection on the significant influence of artificial intelligence (AI) on financial markets over the past two years. The launch of ChatGPT marked the beginning of an AI surge that propelled select US technology companies to unprecedented heights. Nvidia, in particular, has become emblematic of this AI-centric rally, boasting an impressive increase of nearly 1000% since 2021. This surge has increasingly been referred to as the triumph of the "Magnificent 7," a group of major tech firms that together have contributed to a nearly 100% gain since November of the previous year. In contrast, the broader S&P 500 index, which relies heavily on these technology giants—comprising about a third of its total market capitalisation—is poised to conclude the year with a 25% increase, building on a similar advancement witnessed last year.
At the beginning of the current year, analysts were optimistic that the AI-driven enthusiasm would filter out to other sectors, a forecast that has indeed come to pass. However, the performance of the Magnificent 7 has overshadowed many other sectors, many of which have shown little movement. The divergence in performance is exemplified by Apple, which, despite initial hesitance in adapting to AI advances, has experienced a 33% increase this year, having only seen a decline in five trading sessions during December.
As the year draws to a close, trading volumes are notably low, attributed to the holiday season. This period often leads to heightened volatility, as minor movements in the market can result in exaggerated price changes. While some analysts speculate that the AI rally may eventually taper off or correct itself due to inflated valuations and rising expectations, this has not yet materialised. Wall Street analysts have remained optimistic, frequently adjusting their price targets upward.
Looking forward, there appears to be a consensus that 2025 could yield positive results, with easing monetary policies and declining yields potentially boosting the US technology sector and expanding its influence to non-tech sectors and international markets. Europe has been highlighted as a strong candidate for investors aiming to profit from a convergence between European and US stock markets. This optimism springs from the cyclical nature of European markets, which may benefit from more supportive global financial conditions, as well as an existing valuation differential.
The Stoxx 600 index, a key indicator of European stock performance, demonstrated robust growth early in the year but experienced a downturn during the summer months, culminating in a broader stagnation. The European Central Bank's (ECB) rate cuts provided some support, allowing the index to stay within a certain range for much of the year; however, it has been predominantly a select few companies propelling this growth. Siemens was identified as a notable performer, while sectors such as luxury goods, automotive, and substantial corporations like Nestle and Novo Nordisk continue to struggle.
The economic disparity between the US and Europe has further manifested in currency valuations. The US dollar index has celebrated its most successful year since 2015, consolidating gains at elevated levels not seen in over two years. A less dovish stance from the Federal Reserve, coupled with a greater-than-expected growth in the US economy—recording over 3% GDP growth in the last quarter—has propelled the dollar's strength, whereas the euro has weakened significantly, recording a decline of up to 6% against the dollar over the year.
In commodities, gold has performed extraordinarily well, with potential for additional gains if global equity markets see a downturn. Meanwhile, crude oil prices have hovered above key moving averages, though expectations of a supply surplus next year, coupled with ongoing economic challenges in China, may hinder significant price increases.
Source: Noah Wire Services