The markets have taken a remarkable path over the past half-decade. If you think back, it feels like investors have been climbing an increasingly steep and shaky wall of worry – yet here we are, still at the summit.
2019 was the rebound year, with markets recovering sharply from a late 2018 sell-off. Central banks turned dovish, interest rates fell and optimism returned. Then came 2020, a year of volatility as the world grappled with Covid 19. Stocks fell off a cliff in March but climbed back almost as fast, led by Big Tech and pandemic beneficiaries.
By 2021, the reopening trade was in full swing and markets celebrated record earnings and growth. But inflation, though a whisper in 2021, roared to life in 2022 and led to a bear market as interest rates surged. The Fed slammed on the brakes and suddenly the free-money era that fuelled growth stocks was over.
Then came 2023 – a year of resilience. Despite recession fears, markets bounced back, spurred on by cooling inflation and the explosion of enthusiasm around artificial intelligence (AI). Which brings us to 2024, a year when markets continued their upward climb, but not without contradictions or warning signs.
If 2024 had a tagline, it would be something like: “This rally wasn’t supposed to happen – but it did.”
At the start of the year, many economists and strategists were braced for a recession. Higher interest rates, the logic went, would choke off growth, corporate earnings would sag and investors would finally lose their nerve. Instead, the US economy shrugged off the doubts, consumer spending remained surprisingly strong and corporate earnings outperformed expectations.
Until quite recently, the S&P 500 was up around 30%, with the Nasdaq and other major indices posting similarly impressive gains. They’ve fallen in over the past few days, however, after the Federal Reserve suggested it would cut rates just twice in 2025 (down from about six cuts).
Performance of indices over 2024
Source: FE Analytics
At the centre of 2024’s rally was technology (again), particularly stocks linked to the AI boom. The likes of Nvidia, Alphabet and Apple became the standard-bearers for this movement, as investors poured money into companies poised to benefit from AI infrastructure and applications. Nvidia was this year’s darling, with its valuation soaring past $3.6trn at one point.
Bank of America has noted that 2024 looks more like 1996 or 1997 than 1998 or 1999 – years when optimism was high but markets hadn’t yet reached the bubble-breaking point. But when markets feel unstoppable, they rarely are.
So it’s worth asking, have we climbed too far, too fast? Tech valuations are stretched. Nvidia trades at earnings multiples that leave no room for disappointment. Tesla, Palantir and other high-growth names have already blown past Wall Street’s price targets.
Leadership can last longer than anyone expects – Bank of America reminds us that in a bubble, “leadership can outlast your ability to stay underweight” – but even so, momentum fuelled by frothy valuations rarely ends well.
Adding to this fragility is the narrowness of the rally. Some of the Magnificent Seven (Nvidia, Microsoft, Alphabet, Amazon, Apple, Meta and Tesla) have dominated gains in 2024. By mid-year, their combined weight made up over 30% of the S&P 500, the highest level since the dot-com bubble. That should raise eyebrows. When a handful of stocks carry the market, the floor beneath investors gets thinner.
Meanwhile, the broader economic backdrop is no less precarious. Inflation cooled in 2024, leading the Fed to pivot toward rate cuts, but it hasn’t disappeared entirely and has edged up recently. Meanwhile, US housing and service-sector inflation remain stubborn, and any misstep in monetary policy could throw markets off course. Recent days have shown how easily the market can get upset when central banks adjust their plans.
Add in geopolitical tensions, unresolved trade issues and rising global debt levels, and you start to see the cracks forming on that wall of worry.
And yet, despite all of this, the markets kept climbing in 2024. Some of this comes down to resilience – investors refusing to let fear derail their plans. Some of it comes down to opportunity.
Beneath the AI mania, other corners of the market began to stir. Small-cap stocks, beaten down in prior years, showed signs of life as interest rate fears eased. Markets outside of the US, especially in Europe and parts of Asia, might present opportunities for value-seeking investors burned out by tech’s stratospheric prices.
Bank of America also makes a sobering point: markets remain fragile and a shock feels overdue. The Vix, Wall Street’s fear gauge, remained oddly subdued throughout much of the year, despite a notable spike in August.
But complacency is dangerous. Just because a shock hasn’t arrived doesn’t mean one isn’t lurking around the corner. Whether it’s monetary policy, geopolitical, economic or corporate earnings-related, any negative catalyst could remind investors just how fragile this ascent really is.
So, where does this leave us as we look to 2025?
The wall of worry remains, but that’s not necessarily a bad thing. Worry keeps markets grounded; complacency is when you should really start to panic.
Investors need to remember that while leadership trends can persist longer than logic suggests, momentum backed by stretched valuations can unravel quickly. Bank of America’s warnings about fragility and rich valuations are not to be ignored. A shock feels not just possible, but overdue, and markets this concentrated rarely escape unscathed.
This doesn’t mean abandoning the markets. It means being more selective and disciplined than ever. The tech sector may continue its run for a while, but the margin for error is razor-thin. A single earnings miss or shift in sentiment could knock even the strongest performers down a peg.
So diversification is no longer just good theory but a necessity. Overlooked areas like small-caps, energy and international markets may offer more stable footholds for investors seeking better risk-reward balance.
Markets have a habit of humbling those who chase momentum too far or underestimate the weight of risks on the horizon. Yes, there may still be room to climb, but this ascent feels more precarious than it did a year ago.
For those of us looking to 2025, the message is clear: stay vigilant, be prepared for volatility and don’t let the euphoria of today blind you to the reality that markets, like mountains, can slip as quickly as they rise.