It's no secret that stock prices have skyrocketed since the beginning of the year. But what's even more surprising is that these global stock gains extend far beyond just the United States. The major U.S. indexes set record after record in 2024, with the S&P 500 and the Dow Jones Industrial Average both hitting record highs last Friday. Despite some stock market volatility earlier in the week, the two indexes are up 6.3% and 3.7%, respectively, since the beginning of the year. The Nasdaq Composite Index, which has a high proportion of tech stocks, also rose 6.4%. However, the rise in stock prices in 2024 spread beyond domestic borders. Last Friday, Europe's benchmark Stoxx 600 index also ended at a new all-time high, and Japan's Nikkei stock average also hit its highest since 1989 on Thursday. It may seem simple on the surface, but global stocks are going up, so there must be one universal driver, right? But the reasons behind this phenomenon are actually multifaceted, according to Jeffrey Kleintop, chief global investment strategist at Charles Schwab & Co. “They're all at new highs, and there's a reason for that,” he told CNBC in a recent interview. AI drives U.S. stock gains At least in the U.S., much of the bull market thus far has been driven by the artificial intelligence craze and led by technology stocks. Last Thursday and Friday, NVIDIA stock rose nearly 17% after the chip maker's impressive fourth-quarter earnings report that blew away investor expectations. Strong underlying economic fundamentals also support the current bull market. Chief Global's David Kelly said: “The good news is that the economy appears to be avoiding recession and profit margins remain strong. And the even better news is that even though the economy is at full employment, “It looks like inflation could come down regardless.” JP Morgan Asset Management strategist said in a recent interview. Michael Alone, chief investment strategist at State Street, said that even though the better-than-expected economic data supports a reduction in interest rate cuts, the domestic theme of monetary easing also prevails to boost investor enthusiasm. He said that Kelly noted that the market's continued momentum is also driving the market's rise. Investors had to find a home for large sums of money sitting in short-term accounts, and some of it ended up in the stock market. Europe to ease monetary policy A potential interest rate cut by the US Federal Reserve would ease inflation and weaken the dollar, providing a historic tailwind for non-US stocks across the region, Arone said. Additionally, other central banks around the world, including the European Central Bank and the Bank of England, are expected to cut their own rates as well this year. This will stimulate the economy of each region. Kelly also pointed out that foreign markets still stand to benefit from the AI boom, albeit in a more indirect way, as they are not as heavily held in technology stocks. “In the United States, the supply of labor is increasing and there is a large influx of immigrants, but in Japan the supply of labor is not increasing, and in Europe the increase in the supply of labor is very limited. “In some ways, the need for AI to replace the workforce is probably more pressing in Japan and Europe than in the US,” he added. Tight economic policy boosts Japan's assets Interestingly, Japan's bull market appears to be driven in part by the opposite phenomenon: the central bank may actually raise interest rates soon. is. Unlike other central banks, the Bank of Japan keeps interest rates deliberately low, but it will soon be forced to tighten monetary policy. If this happens, the yen will appreciate and shareholder value for Japanese stocks should improve, Arone said. Rising interest rates are typically counterintuitive to a bull market rally, but tighter monetary policy has given Japanese investors “some comfort” by giving them positive signs that the economy and inflation are finally normalizing. Kelly pointed out that there is a possibility that the Schwab's Kleintop said: “Negative or zero interest rates have made Japan a real place to borrow, and negative interest rates have become an important source of investment capital, allowing investors to borrow very cheaply while moving to other countries where they can expect higher returns.'' investments,” he added. . “But now, if interest rates are raised this year, it could encourage Japanese investors to sell overseas assets and bring them home, spurred by a stronger currency that could push interest rates higher in Japan.” Arone said another key reason behind the boom in Japan is the country's recent crackdown on companies adopting more shareholder-friendly policies. The reform efforts are so stringent that the Tokyo Stock Exchange is threatening to delist companies that don't meet the standards by the March 2025 deadline, the strategist added. “Investors are hopeful that this will finally unlock some of the value that is locked up in Japan, where many of these companies trade at far cheaper prices than U.S. stocks,” Arone said. I think there is,” he said. He added that South Korea has similarly adopted similar programs to further enhance shareholder value in its domestic market. If more imitators emerge, this could be yet another catalyst for global stocks. Where do we go from here? State Street strategist Arone believes the market will remain biased to the upside for at least the next 12 months. He cited easing monetary policy, a weaker dollar, and easing inflation as driving factors. “All of these things are going to be the ingredients that are needed to drive up not just U.S. stocks but global stocks over the next 12 months or so,” he said. Arone said there is an opportunity for emerging markets and China, which have traditionally lagged behind, to take on this theme. An unexpected turnaround could result in a slight outperformance and give us a chance to catch up with these markets. More specifically, Arone favors emerging markets in Asia over Latin America and Eastern Europe, citing higher growth rates, rising incomes, a larger middle class, and increased exposure to global trade. ing. Kelly also believes the market is likely to move higher until some external shock puts a pin in the rally. He believes the best way to invest going forward is to have a number of fixed income alternatives and diversify across a variety of equities and international asset classes. Meanwhile, Kleintop believes that some of the Magnificent Seven stocks, in particular, may be trading above their actual valuations, leading to a rise in U.S. stock prices as earnings season progresses. There are growing concerns about the viability of “There are more vulnerabilities than in other markets that are less concentrated,” he said. “I think there's still room for international stocks like Japan and Europe. At the same time, if economic momentum slows a bit and the outlook for production cuts continues to be postponed, the U.S. could hit some more hurdles here.” Like Kelly, Kleintop recommended a broader approach to participating in this global rally. As international equities appear poised to outperform in the next cycle, he recommended investors diversify their international exposure to these categories. — CNBC's Fred Imbert contributed to this report.
