Why the stock market crushed expectations in 2024
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- The S&P 500 has surged 27% in 2024, on track for its best year since 2019.
- Wall Street forecasters weren't particularly bullish at the start of the year.
- AI stocks and diverse sector gains contributed to the S&P 500's impressive performance.
There's still about a month to go, but US stocks are headed for their best performance in years.
The S&P 500 is up about 27% so far this year. That's slightly more than the S&P 500's gain of about 24% in 2023, and if the gains hold, it would mark the benchmark index's strongest year since 2019.
While the market is still bullish on the rally continuing into year-end, few on Wall Street saw this coming.
Heading into the year, the most bullish S&P 500 price target on Wall Street came from Ed Yardeni of Yardeni Research, who called for a 17% surge with his 5,400 price target.
And he was an outlier, with most Wall Street strategists expecting the S&P 500 to rise just 8% to around 5,000.
Since then, the S&P 500 has notched more than 50 daily closing highs, forcing strategists to play catch-up and increase their stock market price targets throughout the year.
The S&P 500 hit a record high of 6,047 on Monday.
Here's what happened this year that helped the market buck the predictions of Wall Street's top forecasters.
The economy is doing great
There were lingering concerns of a potential recession heading into 2024, but those fears ended up being unfounded.
The economy is doing great, evidenced by a solid pace of nearly 3% economic growth as measured by GDP, a labor market that seems to be in the sweet spot with record employment numbers and few firings, and consistently solid retail sales data.
And the solid economy has translated into strong corporate earnings growth, on track to hit new records this year as measured by the S&P 500's earnings per share.
To top it off, inflation has steadily tracked lower throughout the year, edging closer to the Federal Reserve's long-term target of about 2%.
Interest rates are moving lower
With the high inflation rates of 2022 being largely tamed and trending back to normal levels, the Fed has embarked on a cycle of cutting interest rates.
It's the Fed's first interest rate-cutting cycle since the COVID-19 pandemic arrived in March 2020.
So far this year, the Fed has cut interest rates by 75 basis points, and it is largely expected to deliver another 25-basis-point rate cut at its policy meeting later this month.
Falling interest rates are stimulative to the economy and typically act as a tailwind for stock prices. They can help boost corporate profits and improve dynamics related to the traditional discounted cash-flow valuation model used on Wall Street.
The presidential election is over
An undisputed end to the US presidential election last month removed a big overhang of uncertainty for the stock market.
While most market pundits expected a long and drawn-out contest, with the winner potentially not known until weeks after the election, Donald Trump emerged as the clear winner early in the day after the vote.
The election results helped deliver the stock market's best monthly gain of the year, with the Dow Jones and S&P 500 rising 7.5% and 5.7%, respectively in November.
Investors are now focused on Trump's business-friendly agenda for his second term in office, which includes the potential for lower taxes and a wave of deregulation. At the same time, the market has viewed Trump's tariff threats as more bark than bite, so far at least.
The AI trade is still in full swing
The AI boom that unfolded in 2023 spilled over into 2024 and has shown little sign of slowing down.
A string of impressive earnings beats from Nvidia helped propel its stock and other AI-adjacent names to record highs. Wall Street analysts expect the party to continue into 2025 as deliveries for Nvidia's next-generation Blackwell GPU chip get underway.
Year-to-date, shares of Vistra, Nvidia, Dell Technologies, and Broadcom, all seen as big AI beneficiaries, are up 308%, 181%, 63%, and 48%, respectively.
It's not just AI stocks driving the market higher
While AI stocks have surged this year, helping deliver a big gain for the technology sector, 2024 has seen the broader stock market participating in the gains, too.
The best-performing sector year-to-date is financials, which are up 35%, followed by utilities, which gained 28%, industrials and consumer discretionary, which gained 25%, and technology, which gained 22%.
Even on an equal-weighted basis, the S&P 500 is up 18%. So, unlike in 2023, much of the stock market's gains this year aren't concentrated in a handful of stocks.
That's healthy and suggests that 2024's solid year of returns is sustainable.
What's in store for 2025?
Wall Street strategists are largely staying bullish heading into next year.
While some veteran strategists have called for another 20% gain in 2025, sending the S&P 500 to above 7,000, others are taking a more measured view.
JPMorgan, which had been bearish on the stock market since late 2022, flipped bullish and analysts at the bank said they expect an 8% gain next year, with a 6,500 price target.
"US equities should remain supported by the expanding business cycle, US Exceptionalism that is helping broaden the AI cycle and earnings growth, ongoing easing by global central banks and the wind-down of Fed's QT in 1Q," JPMorgan strategist Dubravko Lakos-Bujas said last week.
With the stock market in its bullish seasonal phase heading into the new year, investors could be poised for further gains to cap off an already impressive year.
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