The year 2024 is proving to be another exceptional year for the global stock market, with the MSCI World Index (MXWO) up around 20%. Indeed, since October 2022, the index has recorded an impressive increase of 60%. The question now is whether this upward trend will continue.
Predicting the future of the stock market is not easy, as the last five years have demonstrated. This period has been marked by unpredictable events, from the global pandemic to a major war on the European continent. Despite these circumstances, the global stock market has demonstrated resilience, rewarding patient investors with exceptional returns.
However, the US stock market was the main driver of global stock performance. The United States' share of the MSCI World has increased from 54% to 73% over the past ten years. Among the 15 largest companies in MSCI World, only Novo Nordisk (15th position) is not American. For comparison, twenty years ago, five non-US companies were among the 15 largest. We often talk about “American exceptionalism”, which in the stock market sector turns out to be a reality.
Since the start of 2020, the S&P 500 and the Nasdaq 100 have increased by 100% and 146% respectively, compared to only 41% for the Eurostoxx 600, 76% for the Nikkei 225 and 11% for the MSCI Emerging Markets. This outperformance of the United States is largely due to large American technology companies, in particular the “Magnificent 7” (Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia and Tesla). With the emergence of generative artificial intelligence, the capitalization of these companies has increased by 200% over the last two years. These seven companies now represent more than 30% of the S&P 500 index and 25% of the MSCI World, marking the highest concentration ever observed in the history of this index.
All major regional markets recorded rising valuations in 2024. The United States continues to stand out with valuation multiples (12-month forward price-to-earnings ratio) well above its 20-year median, even excluding major technology stocks. In comparison, Japan and Europe are at the same level as their 20-year average, while China is below this level.
Positive short-term impact of the Trump presidency
The overall picture for equities remains favorable. We expect further interest rate cuts from central banks, relatively low unemployment rates and a resilient global economy. The presidency of Donald Trump, combined with a Republican majority in Congress, should lead to a change in economic regime.
“Trumponomics” should stimulate the American market in the short term, thanks to tax cuts and reduced regulation. This context could favor the recovery of small and medium-sized companies, as well as “value” type stocks and cyclical stocks. The Russell 2000, which has underperformed for two years in a row, could see a strong recovery. Investors should also look at U.S. financial stocks, which could benefit from reduced regulation as well as increased M&A and capital markets activity after a few years of subdued activity. We believe the incentives come from a number of factors: maturing private equity portfolios, mature venture capital pipelines and higher valuations. Private Equity is estimated to have $4 billion in available funds and U.S. companies have $7.5 billion in cash on their balance sheets. However, it remains to be seen what impact Trump's tariff increases and immigration cuts will have on the economy. There are fears that these policy initiatives could lead to higher inflation and therefore interest rates, which could dampen the economy.
An increase of 5 to 10% for the global market in 2025
What about Europe? The region trades at a record discount to the US – even when taking into account sector composition. Indeed, Europe has performed worse than the United States in eight of the last ten years, and this year's underperformance in dollar terms will likely be the worst ever. It is therefore not surprising that global investor sentiment towards the region is gloomy and most are underweight. Even now, investors are struggling to see much upside given weak economic growth, weak Chinese demand, political instability and the risk of increased U.S. tariffs. Further ECB interest rate cuts, a weaker euro and more market-friendly policy could be positive triggers for better stock performance. Among global companies listed in Europe, we see good opportunities for some that trade at a significant discount to their US counterparts.
Looking at sectors, luxury stocks have performed poorly recently amid weak Chinese demand and a general slowdown in growth after the Covid boom. However, given strong demand in the Middle East and the US, we believe there is still room for price targets. Interestingly, given the strength of the stock and housing markets, U.S. household net worth increased by $10 trillion last year alone. In addition, some of the main European technology and health stocks seem low risk to us.
We also continue to monitor the Japanese equity market which, after a strong start to the year, suffered from the liquidation of carry trades in early August and the political unrest in the fall. The underlying growth story remains intact, fueled by domestic reflation, real wage growth, a weak yen, accelerating share buybacks and ongoing corporate reforms. From our point of view, the industrial sector and companies focused on the domestic consumer are positive.
It could still be a tough year for emerging markets as the prospect of a continued strong dollar remains our base case. We therefore recommend that investors be selective. China remains challenged as domestic demand remains weak following the bursting of the housing bubble. Government stimulus plans have not yet proven effective enough to boost domestic consumption. Additionally, an increased trade war with the United States would not improve the outlook. We continue to see India as a net beneficiary as global companies reduce their exposure to China. We believe the Indian equity market will be supported by continued strong economic growth, driven by an expanding middle class, urbanization, a business-friendly government and a young, well-educated workforce.
In summary, we do not expect a third consecutive year of 20% returns for global stocks, but a more moderate rise of 5-10%, driven mainly by earnings growth. We believe diversification will pay off as we see a more diversified return picture: smaller companies, value stocks and cyclicals should have the potential to perform well. Finally, we expect a volatile market, given a very uncertain geopolitical context and an unpredictable White House.
Couple Knut Hellandsvik, CIO Equities chez DNB Asset Management
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About DNB
DNB Asset Management is a leading Nordic asset manager offering products in Nordic asset classes and selected themes. DNB Asset Management is 100% owned by the DNB ASA Group, listed on the Oslo Stock Exchange and one of the largest Nordic financial groups.
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