How Big Tech Will Drive Bullish Market Trends in 2025

2024-11-22
Summary:

US stocks hit new highs; bubbles are emerging, the S&P 500 price-to-earnings ratio has risen to 26 times, and internal share sales have surged.

Wall Street's three main indices hit record highs last week, continuing the red-hot rally that began over a year ago. But retail investors remain outright bullish on the market due to FOMO.

SPXUSD

According to the AAII' latest survey, expectations that stocks will rise over the next six months is now elevated at an "unusually high" 49.8%. The reading was above 50% around 10% of the time after 1987.


Bubble could be rearing its ugly head. Birinyi Associates data showed, the S&P 500 was trading on more than 26 times earnings (TTM) as of 15 November, much higher than 19.7 a year previously.


A knee-jerk action in US stocks has run its course on profit-taking. Even Donald Trump's own media group cash in on the stock market surge that has followed his election victory.


Tesla's CFO Vaibhav Taneja has sold $2 million and board director Kathleen Wilson-Thompson $34.6 million since the election. The EV maker appeared to be among the biggest winners with Elon Musk's political bets.


The rate of so-called insider sales has hit a record high for any quarter in two decades, according to VerityData. It was last this high when Trump was elected president in Nov 2016.


"We have had a good run up. But the other story is that maybe the executives are expecting revisions in equity prices," said Swami Kalpathy, a professor at Texas Christian University, citing uncertainty around Trump.


Upside Potentials

Analysts at Morgan Stanley recommend buying US equities over their international peers. But they note that the 'bull versus bear case skew' next year is unusually wide with Trump heading the White House.


Their base case for the S&P 500 is 6500, up around 10% from Monday's close. Despite that, their bull and bear cases call for 24% upside potential and 23% downside risk respectively.


Their peers at HSBC also saw further upside potential for stocks in 2025, especially in the first half of the year. But they warned that US markets are right at the edge of the 'Danger Zone'.


HSBC's model showed, a "reverse Goldilocks" beckons if 10-year Treasury yield rises above 4.5%. The circumstance in turn "would very likely create 'havoc' across all major asset classes."


Likewise, Goldman Sachs predicted that the index would reach as high as 6,500 by the end of 2025, on the back of continued growth in the US economy and corporate earnings.


According to the bank, the "Magnificent Seven" will still outperform the other companies in the index next year. but the balance of risk from more "macro”"factors will narrow the spread to the lowest in 7 years.

U.S.10 Year Treasury

It warned that risks remain high for the broader the market heading into 2025, due to a potential threat from tariffs and higher bond yields. Treasuries are struggling even after Fed's jumbo rate cut.


Lavish Spending

Nvidia reported Q3 earnings that beat expectations for sales and earnings while delivering a better-than-expected forecast for the current quarter. The stock has nearly tripled in the year.


Anything but a blowout quarter was bound to be a disappointment given the base effect for the bellwether for AI whose business is more dependent than ever on a small group of customers.


Big Tech's capital spending is on track to surpass $200 billion this year and rise even further in 2025. Wall Street is increasingly concerned about the returns on immense investment in AI.


One sign that demand for generative AI was starting to lift Big Tech's growth rates came from the accelerating growth in the cloud divisions at Microsoft and Google. The optimism quickly dissipated though.


Microsoft warned that cloud growth would drop this quarter, while the growth in Google' search volumes slowed. Also, few companies have revealed about the effects of AI on their revenue.


Trump derided the CHIPS Act and said that he preferred to instead put tariffs on chips from overseas. That could push up the cost of AI frontrunners heavily reliant on production outsourcing.


The global foundry industry has effectively become a duopoly as TSMC and Samsung are well ahead of other players regarding process technology. Neither of them is based in the US.


Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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