AI, rate cuts, and Trump lift US stocks to new highs in 2024

US stock index futures edged higher on the last trading day of 2024, capping off a remarkable year that saw equities rally to record highs, fueled by a confluence of factors including post-pandemic economic resilience, anticipation of lower borrowing costs, and the powerful surge of artificial intelligence (AI).

The S&P 500, Dow, and Nasdaq are all nearing record highs, setting the stage for a second consecutive year of substantial gains.

The catalysts: AI, rate cuts, and a Trump victory

A combination of a nearly 100-basis point interest rate cut by the Federal Reserve and a powerful rally in technology stocks, driven by the perceived potential of AI, propelled the market forward throughout 2024.

The S&P 500 tech, communications services, and consumer discretionary sectors have all surged by more than 30% this year, while AI poster-child Nvidia’s nearly 170% surge, while smaller compared to last year, helped it breach $3 trillion in market value.

At the same time, Tesla reclaimed its $1 trillion valuation.

Market momentum heading into the new year

As of 5:45 a.m. ET, Dow E-minis were up 90 points, or 0.21%, S&P 500 E-minis were up 17 points, or 0.29%, and Nasdaq 100 E-minis were up 75.25 points, or 0.36%. Nvidia was up 0.7%, while Tesla added 1.6% in premarket trading.

While trading volume is expected to be light due to the upcoming New Year's holiday, the underlying momentum of the market remains strong. "It's also normal to start thinking that the AI rally will one day fizzle out…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," Ipek Ozkardeskaya, senior analyst at Swissquote Bank, told Reuters.

A Trump tailwind for risk-taking

Toward the end of 2024, risk-taking increased following Donald Trump's presidential win, fueled by hopes that his policies of easing regulations, cutting taxes, and raising tariffs would benefit domestic businesses.

Small-cap stocks also saw a lift from the victory, with the Russell 2000 reaching a record high and setting up for a 10% annual gain, its second in a row.

Banks have also reaped the benefits, with a surge of more than 30% this year.

December volatility and the Fed's stance

Despite the overall positive trends, the market experienced some turbulence in December, with rising yields on Treasury notes and stretched equity valuations triggering a decline.

The S&P 500 is currently on track for its biggest monthly decline since April, reflecting investor concerns about the Fed’s cautious stance.

The yield on the benchmark 10-year Treasury note has retreated from its seven-month high but remains at 4.5%.

Markets perceive Trump’s policies as inflationary, which could slow the pace of the Fed’s rate cuts.

Traders now expect the Fed’s first rate cut of 2025 to occur in either March or May, according to the CME Group’s FedWatch Tool.

Crypto's bullish response

Trump's win has also been a boon for the crypto sector, with bitcoin prices touching $100,000.

MicroStrategy shares have more than tripled in value this year due to its bitcoin acquisitions, while Coinbase and MARA Holdings have also seen gains.

While many sectors have seen substantial growth, the materials sector experienced a decline of over 2%, primarily due to economic challenges in China, a major metals consumer.

This divergence underscores the varied impact of global economic conditions on different sectors.