Nvidia made new milestones this week, but the rally wasn’t just big tech. Today, we unpack the moves across the globe and where we see opportunity.
Authored by: Madison Faller and Matthew Landon
It was a record-breaking week.
In the United States, the S&P 500 notched more record highs as the AI boom grew louder.
Japan’s Nikkei Index made its first all-time high in over three decades. Many now wonder if this marks a new era.
Meanwhile, stock markets across Europe also eclipsed their own highs, with investors seeing more light ahead.
In today’s Top Market Takeaways, we unpack the optimism around the globe, what’s driving it, and where we see opportunity.
United States: The AI boom is booming
The S&P 500 is up about 20% over just the last four months, surging well above the 5,000 mark. This rally has come even with 10-year Treasury yields back at 4.3% and investors paring back bets for Federal Reserve rate cuts this year from around 170 basis points (bps) (implying almost seven cuts) to about 80 bps (or roughly three cuts) today.
Big tech has played a big role. The so-called “Magnificent 7” contributed 60% of the S&P 500’s 26% return last year as AI enthusiasm exploded. Their surge has only continued this year. Just this week, chipmaker Nvidia posted another blockbuster earnings report and added nearly $280 billion to its market value in one day, marking the all-time biggest daily gain for a company. For context, that’s more than the total size of Netflix. Nvidia is now the fourth-biggest company in the world.
This has led some to lament that the stock market is its most concentrated since the 1970s. Some also fear that AI hype is just all talk. Yet, strong earnings have shown big tech companies to be worthy of their rallies. Consider this Q4 season: The Magnificent 7 have cleared a very high bar, beating earnings expectations by roughly 9% on average compared to 4.8% for the broader S&P 500. While AI may be one of the buzziest buzzwords around, the talk and the rally have been underlined by genuine profits.
Not just hype: AI talk is translating into profits
The chart describes the # of times AI mentioned on S&P 500 company earnings calls and Nvidia 12-months forward earnings expectations.
For # of times AI mentioned on S&P 500 company earnings call bars, the first data point came in at 7 in 2013.
Then it went all the way up and hit a peak at 295 in 2023.
The last datapoint came in at 217 in February 2024.
For Nvidia 12-months forward earnings expectations, the first data point came in at 0.24 in 2013.
It went all the way up and the last data point came in at 23.9 in February 2024.
Longer term, it’s also more than just tech that can benefit—companies across industries are making AI investments. As they continue to integrate AI into the fabric of day-to-day operations, we think real cost savings and sales generation are on the horizon.
Japan: At long last, a triumphant return
Japan just made its first new record since 1989. For context, that’s back when the first proposal for the World Wide Web was written, the Berlin Wall had just fallen, and Taylor Swift was born. Soon after, Japan’s massive real estate bubble burst, kicking off “lost decades” marred by economic struggles and deflation.
Japanese stocks just gained their first new record in 34 years
The chart describes the Nikkei 225 index level from 1980 to now.
The line started at 6481.0 in 1980.
It went up and peaked at 38876.9 in 1989.
It came down and reached 7054.1 in 2009.
Then it went all the way up and came in at 39098.7 in 2024.
The 34 years between Japan’s all-time highs is about a decade longer than the S&P 500’s journey to regain its previous record from the Great Depression. So after finally marking such a milestone, are we looking at a changed Japan?
Maybe. Since the 1990s, Japan’s policymakers have kept an ultra-easy policy stance to encourage inflation, and signs are now just pointing to more sustainable progress (investors are betting on the Bank of Japan actually hiking this year). A weaker yen has also boosted Japan’s export-oriented economy and market—a big driver behind Japan’s double-digit returns in 2023. More importantly though, years of corporate reform efforts may finally be paying off. Japanese firms are returning more cash to shareholders through increased dividends and share buybacks to reignite confidence. This is starting to drive more foreign investment flows into its market.
There are still risks. Economic uncertainty remains high. Eventual rate hikes could drive Japanese bond yields higher, and turn the yen from a tailwind to a headwind for profits. Discussion around corporate reform isn’t exactly new. But even with these risks in mind, this week’s breakthrough deserves attention.
Europe: Building its own giants
The story in Europe hasn’t been clear-cut. With about 70% of Q4 earnings in hand so far, Europe has seen the most companies miss expectations since the pandemic, as the bloc’s economy is facing wilting growth.
But the downbeat headlines hide that the Stoxx Europe 600, Germany’s DAX and France’s CAC 40 are all making new record highs. Why? For one, investors are forward-looking, and there are some signals of better pastures when it comes to stabilizing growth and getting inflation under control. More notable though is the fact that Europe is home to a handful of global powerhouses, whose shares are driving its market. In many ways, Europe has quietly been building a “Magnificent 7” of its own that boast international scale and pricing power, with luxury giants such as Louis Vuitton and Ferrari to healthcare innovators such as Novo Nordisk, and key AI players such as ASML and Schneider Electric.
European national champions stand out from the pack
This chart shows the price returns since the start of 2014 for the S&P 500, Euro Stoxx 50 and European national champions, where the latter refers to an equally weighted basket of LVMH, Hermes, Safran, Schneider, ASML, Ferrari, Novo Nordisk.
The Euro Stoxx 50 line hovers around flat for most of the first few years. It then crashes from 25% to -25% during early 2020 before recovering back to 40% by late 2021. From there, it dips back down to around 10% before rebounded to todays 60%.
The S&P 500 line climbs consistently to deliver a return of more than 80% from the start of 2014 to early 2020. The market then comes down to bring returns to 20%. It then recovers over the next two years 50 more than 150% before retracing back below 100% and then rebounding back up to today’s return above 170%.
The European national champions line climbs the most steeply. It rises to 200% by early 2020 before halving over the next couple of months to 100% and then surging close to 450% by the end of 2021. That then comes down to 270% by the middle of 2022 over a volatile period. Since then, it has risen sharply to today’s 650% return over the last 10 years.
While Europe's economy is still finding its footing, the power behind its “national champions” is noteworthy.
But what’s not making new highs?
Not all markets are feeling the good vibes.
In some cases, this may be warranted. For instance, China’s stock market continues to hover around decade-lows amid economic weakness (led by the property sector), geopolitical tension, regulatory hurdles and questions around market-friendly policies. Foreign direct investment in China has fallen negative in recent quarters. Stimulus efforts are slowly taking effect, but more forceful measures are probably needed to become optimistic.
On the other hand, other pockets of the market stand to play catch-up. For instance, we see the potential for small- and mid-cap companies (where, for instance, the Russell 2000 remains more than 15% below its previous highs), as well as themes such as healthcare innovation and ongoing consumer resilience that could support recoveries in some areas going forward. Said another way, we think big tech can continue to climb and other segments of the market can also join in. We think the key is to focus on high-quality earnings growth, and careful stock selection can help tap outperformance opportunities. The current environment looks like fertile ground for active equity managers.
While big tech has dominated, other areas look poised to catch up
The chart describes the index performance for S&P 500, Russell 2000, S&P 400 MIDCAP, and S&P 500 equal weighted for 100=January 1, 2023.
For S&P 500, the first data point came in at 100 in January 2023.
It went up and peaked at 132.3 in February 2024.
For Russell 2000, the first data point came in at 100 in January 2023.
It went up to 113.6 in February 2023.
Then it came down to troughed at 92.9 in October 2023.
Then it came back up and the last data point came in at 114.3 in February 2024.
For S&P 400 MIDCAP, the first data point came in at 100 in January 2023.
It went up to 111.4 in February 2023.
It came down and troughed at 95.7 in October 2023.
It came back up and the last data point came in at 117.4 in February 2024.
For S&P equal weighted, the first data point came in at 100 in January 2023.
It first went up at peaked at108.3 in February 2023.
It came down all the way and troughed at 94.5 in October 2023.
It came back up and peaked at 112.6 in February 2024.
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Index definitions
- The CAC 40 is a benchmark French stock market index. The index represents a capitalization-weighted measure of the 40 most significant stocks among the 100 largest market caps on the Euronext Paris.
- The Magnificent Seven stocks are a group of influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.
- The Nikkei 225, or the Nikkei Stock Average, more commonly called the Nikkei or the Nikkei index, is a stock market index for the Tokyo Stock Exchange.
- The Russell 2000 Index is a small-cap U.S. stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index. The index is maintained by FTSE Russell, a subsidiary of the London Stock Exchange Group.
- The Standard and Poor's Midcap 400, or simply the S&P Midcap 400, is a capitalization-weighted index which measures the performance of the mid-range sector of the U.S. stock market.
- The Standard and Poor's 500, or simply the S&P 500, is a capitalization-weighted stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States.
- The S&P 500 Equal Weight Index is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance.
- The Stoxx Europe 600 Index is derived from the Stoxx Europe Total Market Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 17 countries of the European region.
- The German Stock Index (DAX) is a total return index of 40 selected German blue chip stocks traded on the Frankfurt Stock Exchange. The equities use free float shares in the index calculation. The DAX has a base value of 1,000 as of December 31, 1987. As of June 18, 1999 only XETRA equity prices are used to calculate all DAX indices.
- The EURO STOXX 50 Index, Europe's leading blue-chip index for the Eurozone, provides a blue-chip representation of supersector leaders in the region. The index covers 50 stocks from 11 Eurozone countries. The index is licensed to financial institutions to serve as an underlying for a wide range of investment products such as exchange-traded funds (ETFs), futures, options and structured products.
