Magnificent 7: One Last Trade Before 2025 !
US stocks ended sharply lower on Mon, 30 Dec 2024 as some traders took profits before the end of the year, dimming hopes for the “Santa rally”.
With yet another holiday-shortened week and a light Monday trading volume, it does not take a lot to amplify market volatility, giving active buyers and sellers an outsized impact.
According to Dow Jones Market Data, since 1950, the S&P 500 has gained, on average, 1.3% during this stretch, while finishing higher nearly 80% of the time.
Will 2024 falls under the 1.3% or 80% or remaining 18.7%, that ispelt “bad” news ?
Root causes ?
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End-of-year tax positioning.
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Valuations.
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Climbing Treasury yields.
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2025 uncertainties.
All the above contributed to the risk-off sentiment.
When 4pm came around: (see above)
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DJIA: -0.97% (-418.48 to 42,573.73).
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S&P 500: -1.07% (-63.90 to 5,906.94). Posted 15 new lows.
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Nasdaq: -1.19% (-235.25 to 19,486.78). Strangely, it recorded 63 new highs and 118 new lows.
On NYSE:
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Declining issues outnumbered advancers by a 1.81-to-1 ratio.
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There were 55 new highs and 231 new lows on the NYSE.
On Nasdaq:
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1,604 stocks rose and 2,765 fell.
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Declining issues outnumbered advancers by a 1.72-to-1 ratio.
Trading volume on US exchanges was 14.48 billion shares, compared with the 14.75 billion average for the full session over the last 20 trading days.
S&P 500 Sectors Performances.
The broad selloff dragged all 11 major S&P 500 sectors into negative territory.
All 11 major sectors of S&P 500 lost ground on Monday, with Consumer discretionary (XLY), suffered the largest percentage decline, falling -1.61%.
Despite recent weakness, 2024 has been a banner year for US equities. (see below)
Overall Sector Performances:
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Technology (XLK), Communication services (XLC), and Consumer discretionary (XLY) were on course to notch gains of nearly +30% or more.
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Real estate (XLRE) , poised to nab the dubious distinction of being the sector that did not takeoff, despite 3 interest cuts from the Fed in September, November and December of 2024.
Chicago PMI - December 2024.
One of a few economic reports out this week is the Chicago purchasing manager index (PMI).
It is not widely referenced because it’s about factory sector activity in Chicago area only.
Nevertheless, December’s preliminary readings have slipped by -3.3 points from November’s 40.2 and came in at 36.39, vs economists’ expectations of an improved 42.8 points.
Equally depressing is a key sub-index tracking new orders, has dropped by -13.5 points, plumbing its lowest reading since May 2020.
Note: the 50-point level marked the threshold between an expansion or a contraction in activity levels.
For better clarity on the health of US manufacturing, will need to defer to the US Manufacturing PMI report due out on Fri, 03 Jan 2025.
Not Spared.
After the US election in early November, investors returned to pile up on the Magnificent Seven.
The “outright winner” has been $Tesla Motors(TSLA)$ where money politics paid off handsomely.
Investors piled into Tesla not because of the company’s strong fundamentals but Mr CEO’s influence over returning president.
After the Mag 7’s two December peaks (17th & 24th), they are pulling back and consolidating, like US stock market, (see above)
Only Tesla and $NVIDIA(NVDA)$ have exhibited volatile movement recently.
Remaining five ( $Amazon.com(AMZN)$, $Apple(AAPL)$, $Meta Platforms, Inc.(META)$, Microsoft (MSFT)$ and Alphabet (GOOG)$) have traded within tight price bandings. (see above)
Still Magnificent in 2025 ?
As we head towards 2025, the 2 factors that would dictate US market and naturally the Magnificent 7 would be:
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Treasury yields.
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Inflation.
Rising Treasury Yields.
On Fri, 27 Dec 2024, yield on the benchmark 10-year Treasury rose more than 4 basis points to 4.631% after the rate hit its highest level since May in the previous session. (see above)
With yields exceeding 4.62% already, its the highest levels seen since the April peaks, also the highest in 2024.
Higher yields will hamper growth stocks, as they raise borrowing costs for business expansion.
Inflation.
The last time US inflation hit a level that led to the Fed raising interest rates was in 2021.
Inflation started increasing from April 2021 and surged in 2022, hitting a peak of 9.1% as measured by the Consumer Price Index (CPI) in June 2022.
To combat inflation, the Fed began to raise interest rate progressively and that affected businesses, and the stock market reacted unfavourably. (see above)
With a new incoming US President for the next 4 years, its left to be seen how a set of new policies are going to shape or misshape US economy and the stock market.
Experts Views.
In 2024, Artificial Intelligence (AI) remains the single, main catalyst that have driven the Mag 7 to a banner year.
In 2025, investors expect the hype to continue and spread further into areas like (a) Utilities and (b) software stocks, that stands to benefit from the Mag 7's large AI bets.
Goldman Sachs, Chief US equity strategist, David Kostin commented:
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In 2025, it will be less about a stock’s valuation but more about it’s earnings growth that will determine a stock’s gains.
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Mag 7’s huge earnings growth over the past 18 months is expected to slow. (see above)
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While remaining 497 stocks in S&P 500 are expected to see their earnings improve.
BofA, Head of Equity strategy team, Savita Subramanian is of the opinion:
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AI is definitely playing an important role in 2025 earnings.
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A key factor supporting the expectation of broader earnings growth is “the observation that tech companies are increasing their capital expenditures (capex)”.
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This capex will be diversifying beyond purely technological areas, benefiting a wider range of industries.
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MSFT, AMZN, GOOG & META are expected to increase capex by 17% in 2025, pushing total expenditure in 2025 to $244 billion. (see above)
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For example, the four Mag 7’s will increase spending to pay for power required to run their AI data centres.
This is why Subramanian is bullish about companies exposed to technology buildout.
This includes Utilities sector (XLU), that is already up more than +20% in 2024, partially driven by AI optimism. On Mon, 30 Dec 2024, XLU fell only -0.42%.
With hours to go before 2025 arrives, it is timely to sing “Auld Lang Syne” to reminds us - the tenderness of friendship (in Tiger), joy of celebration investment rewards, and the value of investment memories, good and bad.
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Do you think Magnificent Seven will continue to prosper in 2025 ?
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Do you think the new US government administration will be even more pro-business ?
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