The tech sector has dominated the stock market in 2024, but hopes for a big market rotation in the new year are uncertain. The overall trend remains up, with profits and margins near record levels. Nvidia and Broadcom have been driving this growth, with earnings expected to rise by over 180% and 25%, respectively.
Investors follow the direction of earnings growth, which is why “growth” stocks tend to have higher price-to-earnings ratios than “value” names. The S&P 500 is expected to see an overall earnings increase of roughly 10% this year, marking a fourth year of gains. However, estimates for the other 493 stocks are also expected to rise, particularly in the back half of the year.
This has excited some investors, known as the “rotation” crowd, who hope that the rest of the market will finally see enough improvement in earnings to entice investors away from megacap tech and into the rest of the market. But the author is skeptical about this rotation for two reasons. First, even if megacap tech stocks see slower profit growth next year, their earnings gains would still be above most other companies.
Second, the rest of the market is not setting earnings expectations on fire. The estimated 14% increase in earnings for the other 493 stocks a year from now may not be enough to draw investors away from megacap tech. In fact, even if Nvidia had a terrible year in 2025 with only a 5% gain, investors would likely still hold onto it due to its strong earnings growth.
The new year is uncertain, with the Trump administration’s business-friendly policies and a robust economy bringing potential benefits. However, there are also potential landmines, such as tariffs that could damage the economy and the Fed’s efforts to fight inflation, which could affect earnings and the economy.
Source: https://www.cnbc.com/2024/12/27/tech-stocks-ruled-2024-hopes-for-a-market-rotation-in-2025-are-uncertain.html