What a year it has been

Here we are, the last day and the last trading day of the year. It’s now been about two years that ChatGPT was launched and it’s been two years that the AI buzz pushed some US Big Tech companies to ... the sky, really. Nvidia, which has become the icon of the AI rally, gained almost 1000% since then, the Magnificent 7 nearly 100% since last November, and the S&P500 – where the market cap of the Big Tech stand for about a third of the total market cap – is set to close the year with a 25% advance, after a similar advance the year before. At the start of the year, the Big Tech rally was expected to broaden to the other sectors – which it did – but the broadening of the rally didn’t prevent the Magnificent 7 stocks to contribute to the much of the S&P500’s performance this year, the other sectors were mostly flat, the S&P500 equal-weight index played catch up with the normal-weighted, technology-heavy one, but investors gave in since the beginning of December, where we started seeing the Big Tech appetite take over. Apple for example – which remained on the backfoot with the AI progress and couldn’t do much on that platform yet, rallied 33% this year, and has fallen just 5 sessions since the beginning of the month – just five. Unfortunately, the last few days, even the tech appetite was weak. Santa didn’t show up – perhaps considering that we had enough gifts throughout the year -  the S&P500 lost more than 1% for  second session in a row, and Magnificent 7 was to blame. Together, they gave back 2% on Monday.

Of course, this week, the trading volumes are low, everyone – or almost everyone – is on holiday and the slightest moves in the market lead to exaggerated price action. But on the other hand, it’s also normal to start thinking that the AI rally will – one day – fizzle out, or at least we will see a sizeable correction given that the valuations went too high, and the expectations today have become very difficult to satisfy. But still, all those who called for a correction have so far happened to be wrong, and Wall Street analysts spent the year rising their price targets.

The consensus is that 2025 should be a good year, that the easing central bank policies and falling yields should help the US Big Tech rally to further broaden toward the non-tech pockets of the market, and beyond the US, with Europe seen as a good buy target for those betting that the European stocks will converge with their US peers – partly because their cyclical nature is favourable when global financial conditions ease, and partly because the valuation gap between the two

The Stoxx600 index did well between January and May this year, but then remained rangebound for the rest of the year with a marked selloff in summer. The European Central Bank (ECB) rate cuts certainly helped keeping the index in the upper Fibonacci range for a good part of the year, but it’s only a handful of companies that supported the gains. Among them, Siemens eked out the best performance of the year, the banks did well, but the luxury-stuff makers, the carmakers and heavy names like Nestle and Novo Nordisk have done poorly. You would say that it’s not very different in the US - that a few names shoulder the rally and the rest is sleeping. But in Europe, the overall growth and economic activity remains poor, which certainly pushes – and will continue to push – the ECB to be more aggressive with the rate cuts than the Federal Reserve (Fed).

And that positive divergence of the US economy was also noticeable in the valuation of the US dollar beyond the euro. The US dollar index is, in fact, having its best year since 2015. The dollar index is now consolidating gains at the highest levels in more than 2 years, and could continue to extend gains on the back of a gradually less dovish Fed outlook, based on the fact that the US economy did not weaken as much as it was expected to. On the contrary, the US GDP grew by more than 3% last quarter, versus 0.4% for the eurozone. The euro lost up to 6% against the greenback this year and up to 5% against sterling. The single currency has more room to weaken against both currencies. The pound on the other hand had a good year, but a bad selloff since September. But Cable is preparing to close the year just 1% lower against the dollar, while the USDJPY is behaving like its good, old self: the expectation that the Bank of Japan (BoJ) will normalize its policy gives hope to the bulls, but the BoJ remains short of expectations, then the yen gets sold, then the authorities step in to cool down the selloff by direct intervention and the BoJ helps by saying that they will tighten policy, and the cycle begins again.

In commodities, gold had a stellar year and could see more gains in case of a downside correction in global equity markets. While crude oil – which trades past the 100-DMA today for the first time since October – will likely close the week in the bearish consolidation zone, below the $72.85pb level, as the expectation of an average 1mbpd supply glut next year and China’s inability to reverse weakness will probably limit the upside potential.