Cover:
-The stock market is surging and shows no sign that it will let up in 2025, with investors encouraged to embrace the expanding bubble. Despite events like the presidential election, escalating conflicts overseas, and uncertainty about inflation and the Federal Reserve's rate-cutting plans, investors have been able to reload and capitalize on the growth in the tech-heavy Nasdaq Composite. The S&P 500 is on track to post a gain of almost 30% this year, while the tech-heavy Nasdaq Composite is up nearly 35%. Despite initial ebullience, conditions are less benign today, with the S&P 500's price/earnings ratio approaching frothy. Positive sentiment about the economy and markets has fueled the rise of animal spirits, including equities, Bitcoin, and art.
Interview:
-Barron's has consulted economist Nicholas Bloom, a Stanford University professor, to discuss the debate surrounding the value of remote and hybrid work in corporate and nonprofit sectors. Bloom, who has studied remote work for over two decades and co-founded a research platform, believes the shift to more flexible work arrangements will be enduring due to its broader economic benefits. He has tracked the growth and scope of remote work and the relationship between hybrid work and productivity enhancements.
Tech Trader:
-In 2024, tech companies like Amazon, Microsoft, and Alphabet spent $133B on building AI capacity, a 57% increase from the previous year. Nvidia also saw a 174% increase in data center revenue, reaching $80B over the past three quarters. However, investors are now questioning the return on investment and productivity gains of AI. David Cahn of Sequoia Capital estimates that for AI to be profitable, every dollar invested on infrastructure needs four dollars in revenue. While profits are unlikely to come in 2025, investors will still want to see progress in AI infrastructure. Microsoft's AI strategy focuses on attracting customers to pay for Microsoft 365 Copilot, an AI assistant for popular apps like Word, Excel, and PowerPoint. Copilot costs $360 per user per year, in addition to other software costs ranging from $72 to $657 per year. This high cost of AI makes it a significant investment for investors looking to track its potential in the market.
The Trader:
-The Nasdaq Composite soared above 20,000 for the first time ever on December 11, 2024, less than five years after crossing 10,000 and just weeks after the S&P 500 index crossed 6000 for the first time. However, the excitement quickly faded as the NASDAQ retraced its gains and finished the week up just 0.3% at 19,927. The S&P 500 declined 0.6%, and the Dow Jones Industrial Average dropped 1.8%, ending Friday with a seven-day losing streak. The NASDAQ’s rally has been driven by Big Tech names like Tesla and Alphabet, which may be masking fundamental weaknesses in the broader market. Most stocks outside of the tech industry have been in the midst of a gradual but persistent selloff. For 10 straight days through Friday, more stocks in the S&P 500 fell than rose, the longest such streak since 2000, according to Dow Jones Market Data. The iShares S&P 500 Value exchange-traded fund has fallen for 10 straight days, its worst streak since launching in 2000. The recent rally has been driven by the most exuberantly priced assets.
-Exxon Mobil plans to spend more money on oil and low-carbon products next year, despite oil prices expected to fall next year. CEO Darren Woods believes Exxon is in a different league compared to its competition. However, investors don't like oil companies hiking their spending, as they recall a bygone era of overinvestment and diminishing returns from a decade ago. Exxon argues that it can spend more on high-return projects while decreasing its cost base. The company has outperformed all of its Big Oil competitors over the past five years, investing more than its peers and resulting in more than doubled expected earnings and 70% reduction in net debt. Exxon has returned $140B to shareholders in the form of buybacks and dividends.
Features:
-Inflation remains volatile, with the Federal Reserve having more work to reach its 2% annual target. The Consumer Price Index rose 2.7% year over year in November, above economists' forecasts and October's 2.6%. The Producer Price Index for November rose at a 3% annual rate, beating estimates for 2.6%. Stubborn inflation means the central bank may not be able to cut rates as many times as expected. If the Fed keeps rates higher, it could dent the broader stock market, with the S&P 500 up 28% this year, partly reflecting expectations of continued rate lowering and minimal economic interruption.
-Google parent Alphabet has announced its new quantum-computing chip, Willow, which can complete tasks that would take leading supercomputers 10 septillion years to complete. This breakthrough could bring practical applications closer to reality. Google shares have risen nearly 10% this week on the news. Quantum computing harnesses the principles of quantum mechanics to solve complex problems more quickly than traditional computers. The Massachusetts Institute of Technology named it a breakout technology in 2017. Recent advancements have led to an uptick in interest, with the Defiance Quantum exchange-traded fund up nearly 15% in the past month. Despite the quantum revolution likely taking a long time to play out, the explosion of AI-linked techs has made investors salivate over any technology that could be 'next'.
Europe:
-Government collapses in Germany and France and President Elect Trump’s threat to apply tariffs against the EU to balance the US’s $175 billion trade deficit with the European Union, don’t bode well for Europeans. Meanwhile, Europe is also struggling with China dominating green technologies and consuming electric vehicles. Investors have noticed this, with the iShares MSCI Eurozone exchange-traded fund slipping by 2% over the past six months. Nevertheless, 2025 could be better, with bargains in underperforming stocks. Germany's election in February is expected to bring Christian Democratic leader Friedrich Merz to power, who is expected to unleash budgetary stimulus. Germany's debt to GDP ratio of 64% allows it to invest 1% to 2% per annum on infrastructure. European stocks are 20% cheaper than US peers, even excluding the "magnificent seven" outperforming tech giants.
Emerging Markets:
-No update
Commodities:
-Goldman Sachs predicts that gold prices could break through the $3,000 barrier by the end of 2025, even if the dollar remains high. The team advises investors to watch the Federal Reserve's actions, not the dollar, to determine how high gold prices can go in 2025. Gold prices tend to rise when the US dollar falls, and vice versa, as most gold is priced in dollars. However, both the dollar and gold have rallied this year. The reason for the dollar's strength matters for gold prices, as when economic growth or higher interest rates drive strength in the dollar, gold prices typically soften. However, if the dollar is rising due to the threat of tariffs, which tend to be inflationary, gold and dollar prices tend to move together. The analysts predict that the Federal Reserve and most other central banks will continue their monetary easing cycles in 2025, driving gold higher. The team's base case model shows gold prices will increase by 7% to $3,000 if the Fed cuts rates by another 125 basis points, or 1.25 percentage points, by the end of 2025.
Streetwise:
-Google has introduced a new "quantum computing" chip called Willow, capable of performing calculations, that would take today's fastest supercomputers longer than the age of the universe, in less than five minutes. This development has caused shares of parent Alphabet to rise more than 5% on both Tuesday and Wednesday. The potential for quantum computing in fields like drug discovery outweighs its dangers in code breaking and cyberwarfare. However, the Defiance Quantum ETF (QTUM) has seen a 38% increase this year, compared to 29% for the Global X Artificial Intelligence & Technology ETF (AIQ), making quantum computing even hotter than AI. Quantum computing and AI are not alternatives but complements, and to suggest otherwise raises questions about their bona fides. The article suggests that understanding quantum computing is crucial for understanding the technology, as it is already appearing in everyday conversations and requires a guide to pretending to understand it.