Stock Market Back on Track

Nicolet Wealth Management Monthly Newsletter

Equity Markets Recover

Large-cap equities exhibited a broad recovery, as the S&P 500 index advanced 2.8% to begin 2025 after declining -2.4% in December 2024. This rally differed from ones in 2024: the cheapest stocks in the market led the charge and not those stocks with the highest growth rates. The growth segment of the stock market was led lower by NVIDIA, with the company’s stock price detracting nearly -0.7% from the S&P 500 index’s performance. The leading sector contributors to the market’s return was Financials, followed by Communication Services, Consumer Discretionary, and Healthcare.

Investors Fear U.S. Technology Exceptionalism at Risk

A model release from an AI-assistant Chinese start-up, DeepSeek, pressured the unstoppable rally of U.S. Technology stocks. The Nasdaq Composite, a market representation of technology stocks, dropped 3.1% on January 27, while shares of NVIDIA saw its market value decline by the equivalent of Oracle Corp.’s total market value (about $475 billion) . DeepSeek’s new model effectively proved that AI-assistants can be developed at a fraction of the cost as comparable AI-assistants like ChatGPT. It has been long-believed by investors that AI-assistants necessitates massive and very energy-intensive expenditures and that NVIDIA’s chips had a competitive advantage. This evolution of AI more likely has profound implications for the economy than the stock market, as it can bring potentially more productive resources at cheaper costs.

U.S. Economic Activity Solid to End 2024

Real gross domestic product (a measurement of growth) in the U.S. increased an annualized 2.3% in the fourth quarter of 2024 on a favorable backdrop of consumer spending offsetting growth offsets from Boeing strikes and little replenishment of inventory. Businesses delaying investment spend prior to the election was evident in this report. Nonresidential fixed investment declined an annualized 2.2%, the first decline in more than three years, as equipment spend dropped an annualized 7.8% and outlays for structures declined for a second straight quarter. Weak inventory spending subtracted nearly a full percentage point from growth, the most since early 2023. Looking forward into 2025, the consensus expects U.S. economic growth to slow to 2.2%, due to uncertainty over trade policy.

Retail Sales Remain Strong

U.S. consumer demand ended 2024 favorably, as retail sales rose 0.4% month-over-month after an upwardly revised 0.8% gain in November. Ten of the 13 retail sales categories posted increases, including gains at furniture and sporting goods stores, while auto sales advanced 0.7%. The less volatile segment of retail sales rose 0.4% during the month, and an annualized pace of 5.4% in the latest three months, underlying the recovery in the labor market’s support of consumption.

Bond Yields Stabilize

Interest rates on longer maturity treasury bonds stabilized to start 2025, after rising sharply in Q4 2024. The 10-year U.S. Treasury yield dropped 0.03% to a level of 4.54% despite peaking at a level of 4.79% at one point in January. Investors are attempting to price a quickly changing economic landscape that shifted from slowing labor market and inflation to one that has stabilized in recent months. Interest rates will likely be directionless in the coming months unless there’s a noticeable pivot in the economy or inflation.

 

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