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Political and fiscal troubles pile up in Paris as Athens continues to recover from its debt agony

Commenting on the nervous reaction of bond markets to France’s political crisis, finance minister Antoine Armand felt it necessary last month to state: “France is not Greece.”

I suspect many Greeks greeted his remarks with a mixture of amusement and indignation. For unlike France, Greece these days receives much praise for its fiscal rectitude and political stability, having navigated its way out of the debt emergency that gripped it in the early 2010s.

If, however, we compare France and Greece, what are the similarities and where do the differences lie? I’m at tony.barber@ft.com.  

Converging bond yields, high public debt

Meaningful comparisons between France and Greece must go beyond headline economic and financial data, and take account of political trends as well as the strength of state and private institutions.

All the same, let’s start with some facts and figures that shed some light on the question.

As the chart below shows, French and Greek 10-year government bond yields have converged in recent weeks. That mostly reflects the sharp fall in Greek yields since the debt crisis, but also a steady, smaller increase in French yields since the Covid pandemic.

The spread between French and benchmark German yields is now almost exactly the same as that between Greek and German yields. However, France is nowhere near the precipice towards which Greece was moving a decade ago, when it came close to falling out of the Eurozone.

Regarding public debt, France’s debt-to-GDP ratio now stands at just over 110 per cent, having risen from about 60 per cent at the euro’s birth in 1999. Although France manages its debt with great skill — the average maturity of its long- and medium-term bonds is just over nine years — the rise in the public debt stock is a deeply entrenched trend that needs halting or reversing.

By contrast, when Greece joined the Eurozone in 2001, its debt-to-GDP ratio was already over 100 per cent — a point that raised doubts at the time over Greece’s fitness for membership of Europe’s monetary union.

According to a European Commission report on the Greek economy, published in June, the debt-to-GDP ratio hit a peak of 207 per cent in 2020, before declining to almost 162 per cent last year.

However, as the commission observed, a large chunk of Greek debt is still owned by its official creditors. Coupled with Greece’s rigorous fiscal policies over recent years, this makes the risk of another national debt crisis as remote as in France.

Public spending and tax revenues

One striking parallel between France and Greece concerns public expenditure. In this document, issued by Eurostat, the EU’s statistical agency, we see that France had the EU’s highest level of government expenditure in 2022 at 58.3 per cent of GDP.

Greece had the sixth highest in the 27-nation bloc at 52.9 per cent.

Keeping public spending under control is therefore a challenge for both countries. However, France under the talented technocrats of the Fifth Republic has always been better than modern Greece at collecting (and paying) taxes.

So whereas the French problem concerns persistently high state spending, the Greek problem is more about tax evasion and inefficiencies in the tax system, as highlighted in this article by Thanos Tsiros for the Greek newspaper Kathimerini.

Current account deficits, competitiveness

In a speech this week in New York, Yannis Stournaras, Greece’s central bank governor, described the nation’s economy as “beyond any doubt an international success story over the past few years”, but correctly identified some vulnerabilities.

Stournaras said the most important challenge was Greece’s current account deficit, which at 6.2 per cent of GDP in 2023 was far above the French level of 1 per cent.

He went on to say that the main reason for the deficit was lagging economic competitiveness, and noted that Greece was placed 47th in the Swiss-based International Management Institute Global Competitiveness Index for 2024.

Reading this prompted me to find out where France ranked — and, rather to my surprise, I discovered that it was in 31st place.

This seems low for a country that boasts many first-class private-sector companies and has a historically strong record on labour productivity — which, however, has slipped since the pandemic, as the Banque de France noted in June.

‘A mediocre political class’

Perhaps a clue is to be found in the turbulent state of French politics? In this FT report, an unnamed Paris-based lawyer is quoted as saying:

On one side you have the strong performance of French companies, banks and private equity, and across from you is this kind of incompetence from a mediocre French political class with no vision of the common good.

The conventional view is that President Emmanuel Macron must take much of the blame for the present crisis, having called unnecessarily early legislative elections that produced a parliament so divided that the fall of Michel Barnier’s government was only a matter of time. (Macron yesterday named centrist François Bayrou to replace Barnier.)

However, some commentators contend that it is premature to pronounce that France is on the road to political perdition. Sylvie Kauffmann, writing for the FT, says:

Few experts think the time has come to bury the Fifth Republic. The constitution, they argue, offers flexibility.

In this article for Carnegie Europe, Rym Momtaz says that Macron, despite his domestic woes, is still strong on the international stage in matters such as the Ukraine war, European defence and the Middle East:

This is the paradox the French Fifth Republic presents for its citizens and Europe: the country is reeling from a historic fiscal crisis and political instability not seen since before the second world war, while Macron, the politician most responsible for the situation, is scoring international successes.

Political polarisation

If one compares France with Greece, there are some similarities — and some important differences — between the French political scene now and the Greek scene at the height of the debt crisis.

In France, the hard right and radical left have been gaining strength at the expense of the moderate, technocratic centre.

(In the left’s case, who will buy as a Christmas present “Now, the People!”, the English translation of Jean-Luc Mélenchon’s latest book? According to the blurb, it calls for “permanent insubordination against an unjust and destructive world order” and denounces Macron as the “representative of the bourgeois political bloc”.)

Likewise, in 2015 the Greek debt crisis propelled to power Syriza, a radical leftist party. However, the far right didn’t achieve a major electoral breakthrough in Greece — indeed, it has never enjoyed the influence over national politics that Marine Le Pen’s Rassemblement National has acquired this year in France.

Moreover, Syriza today is a shadow of its former self — divided, unpopular and no longer even the main opposition in Greece’s parliament.

Social discontent and France’s moustache strike

This isn’t to say that all is calm and going well in Greece.

A wiretapping scandal reflected poorly on the government and state institutions. One Greek commentator calls it “one of the biggest scandals since the restoration of democracy” in 1974.

Another observes that Greece’s political system is still “earthquake-prone” and that “anti-systemic sentiment and a penchant for conspiracy theories remain strong”.

However, Greece in recent years has experienced nothing like France’s gilets jaunes (yellow vests) movement or the mass protests against Macron’s pension reforms.

Some would say these events form part of a rich French tradition of social protest. My personal favourite — brought to my attention decades ago by historian Ross McKibbin — is the Great Moustache Strike of 1907, when waiters in Paris stopped work to demand better pay, more time off and the right to grow moustaches, denied at the time to lower-class workers.

The man who founded Dell in a Texas dorm room has transformed his company. It’s not just about PCs anymore.

If you hear Dell and think of the supplier of the PC at your office desk, you’re out of touch.

Michael Dell DELL -0.61%decrease; red down pointing triangle is pulling off one of the most surprising transformations in the history of tech at the company that bears his name, all without changing his approach to business.

He is now the world’s 13th-wealthiest person—neck and neck with Nvidia founder Jensen Huang. He is also the second-longest serving chief executive of any big U.S. company, after Warren Buffett—if you elide a three-year break from 2004 to 2007, when he was the chairman of Dell’s board. He remains the youngest CEO of a company to enter the Fortune 500—a record even Mark Zuckerberg couldn’t break. He is, somehow, not yet 60 years old.

His company has transitioned from a nostalgic mid-90s PC maker to a globe-straddling AI-supercomputer builder that operates in 180 countries. While selling PCs and peripherals still accounts for about half of the company’s revenue, the real business of Dell is infrastructure—the digital kind.

The transition of Dell, the company, mirrors the evolution of Dell, the person. He was once a boyish entrepreneur in thick-framed glasses who started his upgraded-PC company in a college dorm room. He is now a gravelly voiced, contacts-wearing CEO who not only bested corporate raider Carl Icahn in a brutal fight to buy his own company from shareholders in 2013, but also tripled his ownership, so that he now owns about half of the company.

“Michael once said he’ll care about Dell even when he’s dead—and I believe him,” says Marc Benioff, CEO of cloud enterprise-software company Salesforce and a friend of Dell’s. “He may seem like a nice guy, but underneath is the spirit of a WWE wrestler.”

In a recent in-person chat with him, I found Dell to be affable but firm. His tendency to deflect hard questions with a smile was especially evident when I asked whether he’d like to comment on the fall of Intel, a key partner—answer: no—or whether he’s as excited as many of his peers about the potential for a business-friendly regulatory environment under President Trump. “I try to stay out of politics, to be honest,” he says.

What Dell really wants to talk about is computers. Not PCs, per se—Dell is an infrastructure company now, he emphasizes often—but machines vastly more powerful. These include racks of servers—such as the company’s PowerEdge lineup, powered by Nvidia’s latest chips—for companies that want to train their own AIs.

Building these souped-up machines is a continuation of his early days working out of his dorm room at the University of Texas at Austin. The world has changed, but Michael Dell is still doing more or less the same thing, only with better components and 120,000 employees.

The dorm-room operation wasn’t his initial foray into the world of business. The son of an orthodontist father and a stockbroker mother, Dell’s first job was as a dishwasher in a Chinese restaurant at age 12. He began investing his money in stocks and precious metals at 13. By 16, he was selling subscriptions to the Houston Post, and instead of cold-calling potential customers he enlisted friends to go to municipal records offices in over a dozen nearby counties. They compiled addresses for newly married couples and people who had recently moved—and Dell made $18,000 in one year.

Dell’s parents wanted him to be a doctor, and he started studying pre-med at the University of Texas in 1983. From room 2713 of the school’s Dobie Center residential building, he started an informal business upgrading personal computers. His parents found out—and ordered him to stop. Like many rebellious teenagers before and since, he didn’t listen.

In January 1984, he registered his company as PC’s Limited. By May, he had relocated it to a business center in North Austin. He hired several employees, and after earning nearly $200,000 in his first year of business, Dell dropped out of school—with his parents’ blessing.

Four years later, he took Dell public. Four years after that, in 1992, the company joined the Fortune 500. By 1999, Dell had posted the best return to shareholders of any large company over the past three, five and 10 year periods.

“We started out as a company upgrading IBM personal computers, and then we started designing our own computers, and since then we’ve evolved to become the largest IT infrastructure company in the world,” he says.

Much of Dell’s story since he pivoted his company from a PC maker to an IT infrastructure company has been about making bets that were contrary to prevailing thinking. The most notable was taking his company private in 2013 and piling on huge amounts of debt, which he used to buy makers of hardware and software for the cloud, such as EMC and VMware. At the time, analysts rained down a steady drumbeat of dire predictions on his chances of success—only to be proven wrong five years later, when Dell was relisted on the stock market.

All the changes Dell made to his company during that period—the $67 billion acquisition of storage maker EMC in 2016 was at the time the largest tech deal in history—have resulted in a company possessing all the bits required to build the most powerful systems that go into data centers—and which are perfectly suited to training and running AI.

Dell, still based just outside of Austin, doesn’t design or manufacture microchips. It sources them from Intel, Qualcomm, Nvidia and others. And while it writes some of its own software, for the most part the company is a sort of Switzerland in terms of its neutrality toward what runs atop its hardware.

The company specializes in everything sandwiched in between those two ends of the technology stack—between chips and software. It turns out that in the age of AI, there’s a tremendous demand for racks of servers and huge arrays of storage.

Each rack of servers is a stack of computers about the size of a bookshelf. These racks are crammed together inside the vast data centers where the internet actually resides, and the most power-hungry ones, for training AI, can consume as much power as 100 average American homes. They generate so much excess heat that they have to be liquid-cooled. Each one costs hundreds of thousands of dollars—Dell won’t say exactly how much.

In the past two years, his company has sold storage arrays capable of holding a total of 120,000 petabytes, says Dell. For perspective, OpenAI’s latest chatbot, GPT-4o, was trained on about a petabyte of data, which represents all the text on the open internet, the transcripts of over a million hours of YouTube videos, plus countless images.

In that same period, Dell went from having 30 to 40 customers buying AI servers from the company to more than 2,000. “And it will probably be 4,000 in another couple of quarters,” he adds.

Revenue in Dell’s server business grew 58% last quarter, and 80% the quarter before, mostly because the world just can’t stop producing more data at an ever-faster rate. All those short-form videos, social-media posts, hours of streaming entertainment, cloud-gaming services, and fire hoses of consumer-tracking data have to go somewhere, after all. That has translated to an insatiable demand for storage, and computers to process it—and record revenue for Dell.

Tentpole AI projects are also boosting Dell’s bottom line, as when the company was called on to provide much of the hardware inside Colossus, the new AI supercomputer built by Elon Musk’s AI company, in Memphis, Tenn. “It’s an amazing engineering feat,” says Dell. “He placed incredible demands on us, and many others.”

Dell has been inside that data center, with its endless rows of blinking, humming server racks holding 100,000 Nvidia chips. When I asked him what it looked like, he deadpanned, “It looks like a Dell commercial.”

Growth of this magnitude for a company as long in the tooth as Dell leads naturally to the question of whether it’s sustainable. AI companies are now racing each other to build out ever more powerful clusters of computers to train next-generation AIs, and cloud hyperscalers are smashing all records for capital expenditures on more data centers.

But there are many questions about whether sufficient demand from end users for AI will manifest in a way that can justify the historic investment taking place. The challenge looming for Dell is what happens if the reality of AI proves to be less than what we’ve all been promised.

Dell says he thinks we’re just at the start of what will be hockey-stick growth for adoption of AI. But, he adds, “I also believe that any technology that is sufficiently game-changing, by definition there are going to be some excesses—and some mistakes that are made.”

Whether or not those mistakes are isolated, or the entire tech industry is systematically overestimating future returns from for AI in ways that could lead to a bust, is the question on which the future of Dell turns.

Investor attention is likely to spread to companies actually using the technology

Whisper it softly, but is some of the investor fervour around Nvidia cooling just a little? The chipmaker has been a phenomenon, riding the surging demand for its artificial intelligence-empowering chips. The stock has jumped 180 per cent this year, fuelling about a fifth of the S&P 500’s gains in the process.

But trading volume in Nvidia has slowed in recent months with the average number of shares changing hands down 40 per cent from the first half of the year. And over the past six months, its shares are up just 3 per cent compared with more than 11 per cent for the S&P 500. In the last month, Nvidia shares have actually fallen about 9 per cent.

The retreat may simply be year-end profit-taking but it comes as investors consider how the developments in AI will play out in 2025 — probably one of the biggest new year calls they have to make given how important the technology is in driving returns.

“There’s a tension between momentum, which is very powerful in the early stages of technology adoption, and valuation,” says Vanguard chief economist Joe Davis, whose team has mapped the impact of tech adoptions since the Industrial Revolution and who warned recently the market may have got ahead of itself given the early stage of AI development. “If I had a longer horizon, I think being a smart investor would be saying, ‘OK, who’s going to utilise the technology? Who’s going to develop the technology?’”

So far, the companies that have done best in stock market terms are those such as Nvidia, which play a role akin to the sellers of shovels to speculators in a gold rush, facilitating the boom.

Investors have also already backed energy utilities, with nuclear providers Vistra and Constellation Energy both in the top 10 S&P 500 performers this year. In a sign of surging demand for power for AI-related uses, Microsoft in September signed a 20-year deal with Constellation that involves the reopening of the Three Mile Island nuclear plant. 

Jonathan Bram, an infrastructure specialist and senior managing director at BlackRock, points to a recent meeting between OpenAI’s Sam Altman and the White House where the AI pioneer asked for help building a series of 5-gigawatt data centres to support AI development. For context, each would need roughly the output of five nuclear reactors.

“It tells you how challenging it’s going to be to build that infrastructure, as well as to provide the power to energise it,” says Bram, a founder of investment firm Global Infrastructure Partners. “We’re seeing trillions of dollars of potential opportunity to commit capital.” 

Infrastructure in an AI sense could also include groups such as cloud providers, data-centre owners and security software companies — a sector with Palantir, the only S&P 500 stock to have gained more than Vistra and Nvidia, and the only one to have quadrupled in value.

However, increasingly investors will be looking to pick out which companies actually benefit from the use of AI. David Kostin, Goldman Sachs’ chief US equity strategist, outlined this year what he believes will be four phases of investor focus on AI — Nvidia, then AI infrastructure, AI-enabled revenues and AI productivity gains. Now, he says, we are about to move on to the third phase.

“Our thesis is in calendar 2025, we’re going to see a transition from the beneficiaries . . . of the infrastructure spending to the AI spending,” Kostin adds. Potential winners in this phase include software and IT services companies that can generate revenue from their AI-enabled products. Companies highlighted by Kostin’s team recently include Datadog, MongoDB and Snowflake, which help companies manage cloud-based data and infrastructure. Microsoft also made its list.

Phase four, should it happen, are the industries that would be transformed by AI as personal computers and the internet have previously revolutionised the way we operate.

“Ultimately, the bull case from here is the idea that we’re moving back to a productivity-focused corporate America — where companies were actually focused on the hard stuff like productivity and efficiency,” says Savita Subramanian, head of US equity & quantitative strategy at Bank of America, who’s predicting a rally of about 10 per cent in the S&P 500 next year. “We think that AI is part of that productivity and efficiency story, but there are also other routes that should drive that benefit, including digitisation, automation — themes that we’re already seeing come to fruition.”

There are a lot of bold predictions on how AI will change the world. Who knows how many will come to fruition? Given that, here-and-now productivity gains that can be measured through the revenue and costs lines in quarterly updates have a lot of appeal to more cautious investors.

Europe looks like the global economic sick man right now.

Governments have collapsed in both continental big powers, Germany and France. Returning U.S. President Donald Trump threatens to impose massive tariffs to trim a $175 billion trade deficit with the European Union, and to leave Europe on its own to support Ukraine and contain an aggressive Russia. China is dominating green technologies that Europe pioneered and eating the continent’s lunch on electric vehicles.

Investors have noticed. The iShares MSCI Eurozone exchange-traded fund has slipped by 2% over the past six months, while the S&P 500 gained 12%.

Next year could be better, though, throwing up bargains in some underperforming stocks. “The picture is brightening a little bit now,” says Mathieu Savary, chief strategist for Europe at BCA Research.

Markets look hopefully toward Germany’s election in February, expected to bring Christian Democratic leader Friedrich Merz to power in place of Olaf Scholz. Merz will likely unleash budgetary stimulus, which parsimonious Germany can uniquely afford, says Eoin Drea, senior researcher at the Wilfried Martens Centre for European Studies. “With debt to GDP [gross domestic product] at 64%, Germany can easily invest 1% to 2% per annum on infrastructure,” he argues. The country’s constitutional “debt brake” affords “all sorts of wiggle room,” he adds.

Andrew Clifton, an equities portfolio specialist at T. Rowe Price, finds an assortment of German companies worth the current price: engineering conglomerate Siemens, financial services powerhouse Allianz, IT giant SAP, and publisher Springer Nature, which held an initial public offering in October. European stocks as a whole are 20% cheaper than U.S. peers, even excluding the “magnificent seven” of outperforming U.S. tech giants, he figures.

Europe will get to Yes with Trump on trade, avoiding his threatened 10% universal tariff, Savary predicts. The continent can contract with U.S. exporters to supply its burgeoning liquefied natural gas demand, bolstering Trump’s goal of increased petroleum production. Most of the cash from increasing European defense budgets will pour into U.S. arms suppliers.

What trans-Atlantic talks can’t achieve, a depreciating euro might. The common currency has fallen from $1.11 to $1.05 since Oct. 1. Analysts expect parity by early next year as the hot U.S. economy and markets keep sucking in capital.

That will keep exports competitive and boost profits for European manufacturers, who earn most of their revenue outside the EU. “The euro at parity could be an actual positive for European equities,” says Michael Field, European equity strategist at Morningstar.

The worst looks to be over for the euro- zone’s domestic economy, too. From near-recession in 2023, the European Central Bank predicts 1% growth next year. Dwindling inflation will enable the ECB to cut interest rates by another percentage point to 2%, economists predict. “Macroeconomically we are in a much better place than last year,” Morningstar’s Field says.

There is one big black cloud on Europe’s horizon: France. Unlike Germany, Europe’s No. 2 economy needs to cut debt—now at 100% of gross domestic product with a budget gap of 6%—and lacks a clear path out of political stalemate. A fractured parliament ousted Prime Minister Michel Barnier with a no-confidence vote on Dec. 4. Late Friday, Moody’s downgraded France’s credit rating to Aa3 from Aa2.

“Europe needs a functioning German-French axis,” says Carsten Brzeski, global head of macro at ING Research. All the same, next year “could see some seeds planted for more growth and strategic autonomy,” he thinks.

That could be enough to lift some of those lagging stocks.

Wall Street’s market forecasts are too tepid. The S&P 500 could rally next year on a combination of AI growth and deregulation. But investors should prepare for a wilder ride.

The stock market is surging as the year winds down, and shows no sign of slowing in 2025. Investors should embrace the expanding bubble.

Investing arguably was too easy this year. Aside from a brief selloff in early August, the declines have been few and were best used as opportunities to reload. Events that should have sent shudders through the market—the presidential election, escalating conflicts overseas, and uncertainty about the path of inflation and the Federal Reserve’s rate-cutting plans—elicited barely a shrug.

Even relative weakness in the shares of Nvidia, Apple, and the rest of Big Tech during the second half of the year served as little more than an opportunity to prospect in other, forgotten corners of the market, many of which perked up. The result? 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%.

Such ebullience seemed unlikely, if not remote, at the start of 2024. Equity valuations were relatively low, economists were on recession watch, investor sentiment was reserved, and the Fed had yet to start cutting interest rates.

Today, however, conditions are far less benign. The S&P 500’s price/earnings ratio—at around 22 times next year’s expected earnings—is approaching frothy. Positive sentiment about the economy and markets has fueled the rise of animal spirits, from equities to Bitcoin to art. And talk of the Fed is no longer focused on when it will cut rates, but on when it might stop due to inflation’s potential resurgence.

If the stock market were as predictable as the calendar, a significant pullback would be in order right now. Instead, prices are poised to rise further in 2025, although the ride could become a lot wilder.

There is a good chance the S&P 500 will gain far more than Wall Street expects due to the combination of the incoming Trump administration’s deregulation drive and the continued advance of artificial intelligence. Either one on its own would probably be enough to push the market higher. Together they could act as rocket fuel and send stocks into the stratosphere—or, up 15% to 25%.

Yet, coming atop this year’s advance, gains of that magnitude will force uncomfortable decisions. Should investors hold on and ride the market higher, or take profits as stocks continue to climb? “There is a likelihood of building a bigger bubble,” says Benjamin Bowler, head of global equity derivatives research at BofA Securities. “Booms result in bigger busts.”

Dot-Com Redux?

Wall Street—as is its way—is expecting a solid, if unspectacular, year. Market strategists, on average, predict that the S&P 500 will hit around 6500 by the end of 2025, up 7% from a recent 6060, according to Bloomberg data. More than half of strategists have targets between 6500 and 6700, although a few outliers predict a bigger gain or sharp decline.

The consensus forecast seems reasonable based on current earnings expectations. Wall Street is looking for S&P 500 earnings to grow by 15% next year, to $273.25, according to FactSet data. If earnings rise 13% in 2026, to $309.37, dropping the valuation by half a point would put the index at just over 6700 a share, up 10% from Wednesday’s close. Minor adjustments to the multiple or estimates account for most of the differences among strategists’ forecasts.

Read More on the Outlook for 2025

Alphabet and 9 More Stocks to Buy for 2025

The Economy and the Fed Could Shine in 2025. But Keep an Eye on Inflation.

But history rarely is reasonable. Over the past 100 years, the stock market was more likely to gain 10% to 20% annually than 0% to 10%, according to Deutsche Bank data. Overall, stocks gained 20% or more 39% of the time, while dropping 26% of the time. An average year, which analysts are predicting, doesn’t happen all that often, despite the frequency of such predictions.

Neither does a string of 20% annual gains. The S&P 500 has gained 20% or more in consecutive years just three times in its history. It happened in 1935 and 1936, only for the market to plunge 39% in 1937 when mistimed Fed rate hikes and fiscal spending cuts prolonged the Great Depression.

Things turned out better after the 20%-plus rallies of 1954 and ’55: The S&P rose 2.6% in 1956. The most recent skein of hefty gains began in the mid-1990s. Stocks rose 20% or more in 1995, ’96, ’97, and ’98, and almost 20% in 1999. Only the popping of the dot-com bubble in 2000 brought that sequence to an end, and it was ugly. By the time the market bottomed in 2002, the S&P 500 had lost nearly half of its value.

Could investors be looking at a repeat of the dot-com bubble and bust? It’s possible. When John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, initiated a Street-high 2025 price target of 7100 on Dec. 9, the growth of AI technology was a big part of the reason. He compares AI to the arrival of the car in the 1920s, which ushered in improved productivity across the economy. He expects AI to do the same.

“We’re not suggesting paradise on earth nor are we expecting a ‘Goldilocks world,’ but rather a genuine potential for AI to provide greater efficiencies in key areas that are challenging progress today across the sectors and society,” he writes. “The potential for better virtual shovels and virtual drill bits to mine a world of increasing mountains of data to find solutions at a quicker pace could be one of its greatest contributions.”

This market also has something going for it that the dot-com bubble didn’t—the potential for sweeping and stimulative policy changes, namely deregulation and lower taxes. President-elect Donald Trump has pledged to remove 10 regulations for every new one imposed during his second term, which begins in late January. While it might be difficult to fulfill that promise, a deregulatory push is expected to be a big part of his presidency, particularly with Tesla CEO Elon Musk and venture capitalist Vivek Ramaswamy leading the Department of Government Efficiency, a nongovernmental agency that will try to cut some $2 trillion in government spending through 2028.

Manish Kabra, head of U.S. equity strategy at Société Générale, says financials, manufacturing, and energy will likely be the focus of Trump’s deregulation efforts. Fewer regulations could help the U.S. manufacturing sector end the productivity slump in which it has been mired for the past 15 years. Oil-related energy companies could get a profit boost if Trump eliminates rules on carbon dioxide emissions, as he did during his first term. Financials may be the biggest beneficiary, with rules relaxed on everything from “buy now, pay later,” credit-card fees, and big banks.

Lower taxes would also help, with a 15% rate for corporations, down from a current 21%, providing a 2% to 3% lift to earnings per share. “The context should also favor small- and mid-caps, given their higher domestic U.S. exposure, and we would expect them to outperform—especially those with exposure to financials and industrials,” Kabra says.

The combination of AI and deregulation has the potential to boost profit margins, increase earnings, and send stocks meaningfully higher than strategists currently estimate. Although Kabra sees the S&P 500 ending 2025 at 6750, he cites the potential for the index to hit 7500 by the end of next year, and perhaps even 8000 by July 4, 2026, when the U.S. celebrates its 250th anniversary, something he calls “a blue-sky scenario of getting everything right on the Trump agenda.”

The Fed’s Fine Line

Getting everything right won’t be easy, though. The potential benefits of lower taxes and deregulation could be offset—and then some—by tariffs and deportations. Kabra estimates that tariffs could knock 2% to 3% off S&P 500 earnings, one reason why he expects the index to bounce around between 6500 and 7500 next year.

Further inflation could force the Fed to stop cutting rates and raise them instead. And then there’s the possibility of a recession, something investors seem to have put out of their minds even as the unemployment rate rises and other signs of a slowdown emerge.

Peter Berezin, chief global strategist at BCA Research, notes that Trump’s tax cuts didn’t lead to increased capital spending during his first term, and he expects that to be the case again. What’s more, the possibility of a trade war could lower corporate spending and hit consumers hard. “We’re on a path to recession regardless,” says Berezin, who has a Street-low target of 4450 on the S&P 500. “Trump’s victory heightens other risks to the economy.”

Investors also need to be wary of the Federal Reserve, which is expected to cut rates in December, and three more times next year. Fed Chair Jerome Powell has to walk a fine line, ensuring that the economy keeps growing and inflation keeps falling. If inflation, which was relatively unchanged in November, proves resurgent, those rate cuts could be at risk—and with them, the market rally.

The Fed, though, could err on the side of growth and keep cutting despite hotter inflation, which would just add more fuel to the stock market’s rise. “Unless a December cut is accompanied by a very hawkish press conference by Powell, which he has not delivered since becoming a dove at August’s Jackson Hole speech, it could send the stock market melting up even higher,” writes Edward Yardeni, president of Yardeni Research, who has a 7000 target on the S&P 500. “That would increase the likelihood of a stock market correction early next year and risk overheating the economy.”

Valuations also look rich, but may be less of a risk than they are made out to be. The market is more expensive than at any time before, save for the peak of the Covid-19 rebound in 2022 and the dot-com bubble. But loftier price-to-earnings ratios also reflect changes in the S&P’s components, says Adam Parker, founder of Trivariate Research. For instance, the S&P 500 was previously overweight manufacturing, but is now dominated by technology and tech-adjacent companies. Profitability is also better, with 36% of companies boasting margins above 60%.

If AI can provide a boost to earnings, growth could make today’s valuations look cheap, Parker says. What’s more, valuation is a lousy timing tool. While high or low valuations can be predictive of returns over a long horizon, they have little correlation to the market’s performance over the next 12 months. “On a one-year view, valuation isn’t helpful,” Parker says.

But high valuations are uncomfortable, and investors will have to embrace a degree of discomfort to get through 2025. BofA’s Bowler points out that there hasn’t been a convergence of deregulation and technological innovation since the 1920s, when electricity and autos were becoming mainstream and Calvin Coolidge became president. The combination has the potential to inflate an already expensive market even further.

Volatility usually rises during a bubble, Bowler says, which makes it unlikely that the Cboe Volatility Index, or VIX, will regularly trade below 10 next year as it did in 2017, the first year of Trump’s first term. Instead, volatility could rise along with the stock market, as it did in the latter years of the dot-com boom. “This should support equity volatility no matter the market direction, as risk historically rises when valuations are this stretched,” Bowler says.

He recommends using options strategies, which look cheap right now, to hedge downside exposure.

Playing Offense

But leaning defensive is unlikely to produce the results investors want. Andrew Slimmon, senior portfolio manager at Morgan Stanley Investment Management, notes that defensive sectors such as staples and healthcare have underperformed in 2024: The Consumer Staples Select Sector SPDR exchange-traded fund has gained just 15% this year, while the Health Care Select Sector SPDR ETF has risen just 5.7%. That underperformance could continue in 2025 as investors chase riskier sectors.

Slimmon also worries that stable growers with high valuations could run into trouble next year for the same reason. “We are entering the optimism phase, and that’s going to continue into 2025, especially if the Fed is going to cut rates,” Slimmon says.

With animal spirits back, Deutsche Bank strategist Binky Chadha, who has a 7000 target on the S&P 500 for 2025, recommends sticking with more economically sensitive sectors. He has Overweight ratings on consumer cyclicals, materials, and financials, while remaining Underweight on defensive sectors, including staples, healthcare, and telecommunications. Financials should benefit from a pickup in loan growth and resurgent merger activity, while materials are cheap enough to rebound if economic activity accelerates globally and the dollar’s strength recedes.

Big tech may offer the best combination of growth and safety in 2025. Chris Senyek, chief investment strategist at Wolfe Research, argues that the Magnificent Seven— Alphabet, Amazon.com, Apple, Meta Platforms , Nvidia, Microsoft, and Tesla—have everything investors will be looking for next year. They’re still benefiting from the shift to AI, and their earnings growth remains strong, even if the rest of the index is catching up.

The Mag Seven also have defensive characteristics that could come in handy when volatility reemerges. Senyek prefers Nvidia, Amazon, Tesla, and Meta because they are more economically sensitive and should benefit as U.S. growth improves. “Our sense remains that as long as fundamentals for the Mag 7 remain strong in the quarters ahead, the group should continue to outperform,” he says. “We don’t see this dynamic changing until either the other side of the next recession and/or if AI enthusiasm substantially wanes. Said differently, something needs to pop the mini-bubble.”

That’s something we’ll worry about in 2026.

OpenAI fired back at billionaire Elon Musk on Friday, publishing a series of emails and texts that the company claims show Musk’s lawsuit against it is misleading.

Musk’s legal battle with OpenAI, which has been going on for months now, at its core accuses the company of abandoning its original nonprofit mission to make the fruits of its AI research available to all. Things escalated last month, when Musk’s legal team filed for an injunction to halt OpenAI’s in-progress transition from a nonprofit to a for-profit corporation.

OpenAI says Musk’s complaints are baseless — and simply a case of sour grapes.

As far back as 2015, Musk floated the idea of an OpenAI with both a nonprofit and for-profit component, the OpenAI-published emails and texts show. OpenAI ultimately launched as a nonprofit, but several years later faced financing challenges.

On June 13, 2017, according to the OpenAI-published exchanges, Musk suggested that OpenAI merge with a hardware startup — possibly chip company Cerebras. Several members of OpenAI’s leadership agreed, per the messages, and OpenAI started down a path to what president Greg Brockman called an “AI research + hardware for-profit.”

Musk demanded majority equity, OpenAI claims — between 50% and 60%. And he laid out an org structure where he would “unequivocally have initial control of the company” — and be installed its CEO.

Musk went so far as to create a public benefit corporation called “Open Artificial Intelligence Technologies, Inc,” registered in Delaware. But OpenAI leadership rejected Musk’s terms.

Musk then recommended that OpenAI spin into Tesla, his electric vehicle company, with a $1 billion budget that would “increase exponentially.” OpenAI leadership shot this proposal down, too.

It’s at that point, in 2018, that Musk resigned from OpenAI — and largely cut ties with its C-suite. OpenAI claims that it’s offered Musk equity in its for-profit wing on more than one occasion, but that Musk has always declined.

“You can’t sue your way to [artificial general intelligence,]” OpenAI said in a statement. “We have great respect for Elon’s accomplishments and gratitude for his early contributions to OpenAI, but he should be competing in the marketplace rather than the courtroom.”

Musk formed his answer to OpenAI, xAI, last year. Soon after, the company released Grok, an AI model that now powers a number of features on Musk’s social network, X (formerly known as Twitter). xAI also offers an API that allows customers to build Grok into third-party apps, platforms, and services.

In a complaint filed late last month, Musk’s attorneys allege OpenAI is depriving xAI of capital by extracting promises from investors not to fund it and the competition. In October, the Financial Times reported that OpenAI demanded investors in its latest funding round abstain from also funding any of OpenAI’s rivals, including xAI.

Of course, xAI has had no trouble raising money lately. Last month, the firm closed a $6 billion round reportedly with participation from prominent investors including Andreessen Horowitz and Fidelity. With around $12 billion in the bank, xAI is one of the best-funded AI companies in the world.

Musk’s motion for an injunction also alleges that OpenAI and Microsoft, its close collaborator and an investor, illegally share proprietary information and resources. Google reportedly has also called for investigations into Microsoft’s relationship with OpenAI, specifically the two orgs’ cloud computing arrangements.

OpenAI is under pressure to complete its for-profit transition quickly. According to Bloomberg, investors in its latest funding round will be able to claw back their cash if OpenAI doesn’t convert from a non-profit within two years.

Mark Zuckerberg’s company is siding with Elon Musk in a fight against the developer of ChatGPT

Meta META -1.66%decrease; red down pointing triangle Platforms is urging California’s attorney general to block OpenAI’s planned conversion to a for-profit company, siding with Elon Musk in a battle between Silicon Valley’s most powerful artificial intelligence players.

In a letter to Attorney General Rob Bonta dated Thursday, Meta said allowing the ChatGPT maker to become a for-profit company would set a dangerous precedent of allowing startups to enjoy the advantages of nonprofit status until they are poised to become profitable.

“OpenAI’s conduct could have seismic implications for Silicon Valley,” Meta wrote in the letter. “If OpenAI’s new business model is valid, non-profit investors would get the same for-profit upside as those who invest the conventional way in for-profit companies while also benefiting from tax write-offs bestowed by the government.”

Representatives for OpenAI and Bonta didn’t immediately respond to requests for comment.

Meta is one of OpenAI’s biggest competitors and has invested billions of dollars to develop its own AI technology that matches or exceeds ChatGPT. OpenAI is also closely allied with two large Meta rivals: Microsoft, which is OpenAI’s biggest investor, and Apple, which integrated ChatGPT into its own AI product.

Meta hasn’t previously weighed in on the long-running feud between Musk, who co-founded OpenAI in 2015 and then left amid a power struggle in 2018, and OpenAI Chief Executive Sam Altman.

Musk, who runs a rival company called xAI, has filed a series of legal complaints against OpenAI, the most recent of which was filed last month. He has accused OpenAI of betraying its original nonprofit mission by creating a for-profit arm and colluding with its largest investor, Microsoft, to dominate the development of AI.

In its letter, Meta said it supported an effort by Musk and Shivon Zilis, a business and personal associate, to represent the interests of the public in deciding whether OpenAI will be allowed to become a for-profit company.

“Although we ask your office to take direct action, we believe that Mr. Musk and Ms. Zilis are qualified and well-positioned to represent the interests of Californians in this matter,” Meta wrote.

Meta CEO Mark Zuckerberg and Musk have butted heads in the past. At one point last summer, the two tentatively agreed to fight each other in a cage match, though it never happened.

Musk didn’t respond to requests for comment.

OpenAI recently completed a $6.6 billion funding round valuing it at $157 billion and told investors they could have their money back if it doesn’t become a for-profit company within two years.

On Friday, OpenAI published a series of internal documents meant to rebut Musk’s request last month for a preliminary injunction blocking it from transitioning to a for-profit company.

Musk has argued he was manipulated into believing OpenAI would be a purely nonprofit venture when he initially invested in it.

OpenAI said the documents show that Musk, in fact, previously backed the idea. “When he didn’t get majority equity and full control, he walked away and told us we would fail,” the company wrote on its blog. “Now that OpenAI is the leading AI research lab and Elon runs a competing AI company, he’s asking the court to stop us from effectively pursuing our mission.”

The documents show Musk had his wealth manager register a public-benefit corporation—a for-profit company that is also committed to a social good—called Open Artificial Intelligence Technologies Inc., in Delaware in September of 2017. Two days earlier, Musk wrote OpenAI co-founder Ilya Sutskever an email proposing a for-profit structure in which he would “unequivocally have initial control of the company.”

The Wall Street Journal couldn’t independently verify the authenticity of the documents OpenAI published.

The documents show that, from the earliest days of OpenAI, Musk was somewhat skeptical about its nonprofit structure. When Altman wrote Musk in November 2015 proposing a nonprofit, Musk pushed back, saying the structure didn’t seem optimal. “Probably better to have a standard C corp with a parallel nonprofit,” he responded, referring to a typical for-profit business structure.

In August of 2017, a bot created by OpenAI beat one of the world’s best players at a one-on-one match of Dota 2, a complex multiplayer videogame. Musk emailed his OpenAI co-founders, including Altman, Greg Brockman and Chief Scientist Sutskever, saying, “Time to make the next step for OpenAI. This is the triggering event.”

Over the next six weeks, according to the documents OpenAI published, the co-founders discussed creating a for-profit entity, with Musk proposing a structure in which he would have majority ownership. During this period, Zilis, who was acting as the liaison between Musk and OpenAI, texted Brockman that Musk “sounded fairly non-negotiable on his equity being between 50-60.” Musk then wrote Sutskever an email in September of 2017 proposing that he have initial control.

In January 2018, Musk suggested in an email to Altman, Brockman, Sutskever and Zilis that OpenAI merge with Tesla or else face “certain failure relative to Google.” He left the company later that year.

Musk has become an increasingly aggressive antagonist of OpenAI since it launched ChatGPT in November of 2022, setting off the current boom around generative AI.

Almost immediately, Musk cut off OpenAI’s access to Twitter data.

He also began criticizing a structure set up by Altman in 2019 in which OpenAI has a for-profit subsidiary in which Microsoft and others invested. The for-profit subsidiary’s value skyrocketed following ChatGPT’s debut.

“I’m still confused as to how a non-profit to which I donated ~$100M somehow became a $30B market cap for-profit. If this is legal, why doesn’t everyone do it?” Musk posted in March 2023.