In a remarkable year for Wall Street, the MSCI World Index of developed-market equities is experiencing its most significant rally since 2019, propelled by the US and inching closer to its historical peak. The global benchmark is now merely 3% away from its all-time high, recording a 21% surge this year, while the MSCI Emerging Markets Index lags behind with a 4% increase. The US stock market, particularly the S&P 500 and Nasdaq 100, has played a pivotal role, with both indices nearing their highest levels ever.
Of the 30 biggest contributors to the MSCI World benchmark’s advance, 28 are based in the US, including giants like Apple Inc. and Nvidia Corp. Novo Nordisk A/S, ranked 14th, disrupts the US dominance, thanks to the fervor surrounding weight-loss drugs, while Toyota Motor Corp. holds the 29th position.
Developed-market stocks have injected nearly $11 trillion into the world index’s value, fueled by resilient economies and growing optimism about central banks shifting towards monetary easing. The surge in US stocks, particularly in artificial intelligence-related sectors like Nvidia and Microsoft Corp., has been a significant driver. Japanese equities have also soared, benefiting from the return of inflation and a weaker yen supporting export-oriented companies.
Positive sentiment towards US stocks is expected to persist into the next year, with strategists from Bank of America Corp., Goldman Sachs Group Inc., and Oppenheimer Asset Management predicting the S&P 500 index to reach 5,000 points or higher over the next 12 months as interest rates decline and “US exceptionalism” endures.
However, cautionary notes have emerged, with RBC Capital Markets and Citigroup Inc. strategists warning of potential near-term pullbacks due to overly bullish sentiment and positioning. Some technical indicators, such as the S&P 500’s relative strength index, signal that the benchmark is the most overbought since September 2020 after the rally since late October.
Despite concerns, the market remains optimistic, even in the face of warnings from Federal Reserve speakers. Marija Veitmane, Senior Multi-Asset Strategist at State Street Global Markets, notes that the market has priced in an aggressive cutting cycle, anticipating a further decline in inflation with only a minor deterioration in the growth outlook. The challenge lies in economic data aligning perfectly, as deviations in either direction could disrupt the market.
