Do you believe in miracles?
Maybe you should after this year on Wall Street. 2024 wasn’t supposed to be as good to equity investors as it was. Not after 2023’s blockbuster gains. And yet here we are, with just two trading days left on the calendar staring at a marvel: Consecutive years of 20%+ gains for the benchmark of all risk asset benchmarks.
Evercore’s Julian Emanuel, in remarks to Bloomberg for a piece dated December 29, said, “There’s an element of miraculousness to it.” I don’t know about all that. When I think “miracle,” I think water into wine (or water into Blue Label), but it’s rare, I’ll give him that.
The table below, from BofA, is worth revisiting in that regard. There are four other historical instances of back-to-back annual 20% gains for the S&P 500. One of them occurred around the last (and, many would argue, the only) Fed-engineered soft landing. (Speaking of miracles, soft landings count.)
Suffice to say many still view the late 90s as the best analogue for the current conjuncture. The Fed appears poised to execute, at the least, a soft-ish landing, and stop me if you’ve heard this before, but bulls swear we’re witnessing the dawn of a new tech epoch with the potential to usher in miraculous productivity gains which could tamp down inflation even as the US economy steams along.
Wishful thinking? Probably. But you never know. Stranger things have happened, and having learned their lesson after collectively underestimating the S&P’s capacity to keep running by 24.2% in 2024 (Wall Street’s average year-end 2024 target was 4,842 as of this time last year), highly-paid clairvoyants who collect six times the median household income for their services are all aboard the bull train for 2025. Exactly none of the 19 top-down strategists followed by Bloomberg sees a decline for the S&P in the new year. The most pessimistic forecast is for a sideways market. The loftiest target is now 7,100 SPX.
If you’re wondering how large of a role the Magnificent 7 played in 2024’s Wall Street encore, the answer’s obviously “large.” The celebrated septet notched a 70% gain after more than doubling in 2023. Those names now account for almost 35% of index market cap. Since the cycle lows for stocks in October of 2022, just 10 names are responsible for 60% of the overall equity gains.
As JonesTrading’s Mike O’Rourke observed, the rally for some of the mega-caps is outpacing the fundamentals. “Over the two years ended in September, operating income for the group rose 56% to $543 billion,” he wrote, in his latest, noting that “just under 60% of that growth was Nvidia and Amazon.” Alphabet, Meta and Microsoft chipped in too, but Apple really didn’t and Tesla was a drag.
And yet, as O’Rourke went on to say, slow growth hasn’t stopped Apple from doubling over the past two years, nor Tesla from surging 250%. Meta’s gain, a silly 400% over two years, “far outstripp[ed] its operating income growth of 70%,” O’Rourke added. In the same vein, Microsoft and Google rallied 80% and 120%, respectively, against operating income increases of roughly 34%.
When viewed in that light, maybe there is, as Evercore’s Emanuel put it, “an element of miraculousness to it.” Or maybe it’s just that markets can stay irrational longer than naysayers can stay solvent. Or employed. Whichever the case might be.
