Stock indexes continue to be buoyed by multinational tech giants like Apple, Microsoft and Nvidia, with investor exuberance for artificial intelligence pushing up prices of these already richly valued stocks, which have a big influence on the market because of their size. This month, Broadcom, a chipmaker, became the latest company to achieve a trillion-dollar valuation.
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The tech-heavy Nasdaq composite is poised for a gain of more than 30 per cent this year, greatly outpacing indexes like the Russell 2000, which tracks smaller companies more linked to the ebb and flow of the domestic economy. The Russell index is set to rise about 10 per cent this year.
Even with the world’s largest economy in solid shape, analysts’ bullish forecasts are being made against an uncertain backdrop. Some fear the US economy could yet falter, with unemployment, credit card delinquencies, corporate debt defaults and bankruptcies creeping up. Other market watchers counter that much will depend on the policies pursued by the incoming administration when Donald Trump takes over in January.
Proposals to lower corporate taxes and ease regulation are seen by many investors as easy to put in place and broadly positive for company profits and the stock market. But hefty tariffs and widespread deportations risk reigniting inflation, which could stall interest rate cuts and upset the market rally. For now, investors and analysts appear willing to wait for more details from the Trump administration.
When Fed officials met in December, they opted to cut interest rates to address the economy as it was, not as it could take shape when Trump moves back into the White House. Nonetheless, one of the central bank’s governors broke from the consensus, voting against lowering rates on fears of inflation accelerating again next year.
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Torsten Slok, an economist at investment manager Apollo, said that with stock prices close to record highs, investors risk becoming complacent. Inflation has not fully returned to the Fed’s target of 2 per cent, and potential policies on imposing tariffs and restricting immigration are “increasing the risk of a resurgence.”
Should inflation accelerate, the likelihood of rate cuts by the Fed next year would erode, removing some support for the stock market. Some believe that the market reaction to White House policy proposals could serve as a check on Trump’s most aggressive instincts.
“I don’t think tariffs will be as severe,” said Andrew Brenner, head of international fixed income at National Alliance Securities. “The bark will be worse than the bite.”
That said, after such a long rally the recent burst of optimism about next year leaves little margin for error, said McKnight of Regions Bank.
“There is not a whole lot of wiggle room,” he said.
This article originally appeared in The New York Times.
