MW U.S. stocks dominated global markets in 2024 - why they likely won't in 2025

By Isabel Wang

The U.S. stock market remained the envy of the world in 2024, extending its outperformance against international peers and claiming an even bigger slice of the multitrillion-dollar global equity market.

But the dominance of U.S. equities over the rest of the world is likely to abate in 2025 given uncertainty around Donald Trump's tariff plans and the Federal Reserve's monetary policy, according to market analysts.

American stocks last week closed out another impressive year on Wall Street, but their performance relative to the rest of the world was even more remarkable. The U.S. large-cap benchmark S&P 500 index SPX surged 23.3% in 2024, outpacing the STOXX Europe 600's XX:SXXP nearly 6% advance by the widest margin in four years. Japan's Nikkei 225 JP:NIK index was up 19.2% and China's Shanghai Composite CN:SHCOMP rose 12.7% in the same period, according to FactSet data.

Exchange-traded funds tracking the S&P 500 IVV VOO also outshone nearly all comers, popping at least 23% in 2024, while the iShares MSCI China ETF MCHI rose 15%. The iShares MSCI Japan ETF EWJ eked out a modest gain of 4.6%, and the iShares Europe ETF IEV fell 1.5% for the year, according to FactSet.

That outperformance made U.S. stocks dominate the global equity market when it came to size. The U.S. market, worth a whopping $63 trillion as of December, added nearly $11 trillion in market capitalization in 2024. U.S.-listed companies also accounted for more than 50% of the global market's value by the end of last year, while Europe, mainland China and Hong Kong combined made up only 25%, according to Dow Jones Market Data (see chart below).

Will tech keep the U.S. market 'in the lead' in 2025?

To be sure, technology companies and the rising demand for artificial intelligence continued to be a driving force behind the U.S. stock rally in 2024. The combined market capitalization of the so-called Magnificent Seven group of tech behemoths reached $17.6 trillion as of Dec. 31, surpassing the European market's $16.1 trillion total market cap, according to Dow Jones Market Data.

AI darling Nvidia Corp. $(NVDA)$ emerged as the largest gainer in terms of market capitalization in 2024. The company added nearly $2.1 trillion in market value in 2024, closing out the year at around $3.29 trillion, according to Dow Jones Market Data.

Such leadership is expected to help the U.S. market to "stay in the lead in 2025," a team of strategists at Barclays Investment Bank wrote in a Friday client note. But they said investors should look for "some convergence [of U.S. stocks] versus the rest-of-world equities," and that the outperformance is likely to "normalize" from here.

"Significant risks are indeed coming from the policy side, with much uncertainty on how Trumponomics will materialize, and whether the Fed will manage to keep the Treasury yield BX:TMUBMUSD10Y below 5%," the Barclays strategists said.

Brad Conger, chief investment officer at Hirtle Callaghan & Co., said technology stocks will be vulnerable in 2025 due to potential retaliation from the Chinese government against the U.S. crackdown on chips, as well as how soaring AI demand might be overhyped.

"The assumptions that are built into the AI story are aggressive, and investors are pricing in absolutely zero geopolitical impact and retaliation from China on the U.S. tech companies," he told MarketWatch via phone on Monday.

China last month reportedly investigated Nvidia over suspected violations of Chinese antimonopoly laws, a probe widely seen as a retaliatory shot against Washington's latest curbs on the Chinese chip sector.

U.S. exceptionalism still dominates

2024 was another year of "American exceptionalism" as far as stocks and the economy were concerned.

U.S. stocks' outperformance in 2024 led many investors to believe there is no good alternative. Meanwhile, the U.S. economy remained resilient, with the unemployment rate hovering near historic lows. The U.S. dollar was also on a tear, hitting its highest level in more than two years.

See: Wall Street sees 'no alternative' to U.S. stocks in 2025. Here's why.

Looking forward, U.S. equities and the greenback remain the biggest beneficiaries of robust economic growth that seems set to be boosted by President-elect Donald Trump's second term in 2025, said Mark Malek, chief investment officer at Siebert Financial.

"U.S. exceptionalism could happen through policies, with everyone expecting that the Trump administration is going to be aggressively putting down foreign economies and very aggressively pulling up our economy," Malek told MarketWatch in a phone interview on Monday.

Such a trend is also "very clear" in the currency market, which is showing signs that Trump's potential trade policies could make U.S. assets outperform those of other countries, he said.

The ICE U.S. Dollar Index DXY, a measure of the currency against a basket of six major rivals, has advanced more than 2% over the past month. Last week, the greenback rose to its highest level in more than two years as traders bet that the world's biggest economy will enjoy stronger growth than the rest of the world in 2025 - and that the Fed will thus cut interest rates at a slower pace than previously anticipated.

See: The economy grew rapidly in the past 2 years. Can it keep it up under Trump 2.0?

However, Conger said that U.S. investors have been "underestimating" the reaction of the rest of the world to Trump's tariffs.

"The stock market is not assigning any probability to the possible reaction of the European and the Chinese to his tariff plans, which will hurt U.S. companies in a trade war," he said. "We are very blasé about the potential for U.S. stocks in 2025, and we are positioned for a U.S. underperformance relative to the rest of the world."

U.S. stocks finished mostly higher on Monday, with the Nasdaq Composite COMP up more than 1.2%. The Dow Jones Industrial Average DJIA ended down 0.1%, and the S&P 500 rose 0.6%, according to FactSet data.

-Isabel Wang

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

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January 07, 2025 06:00 ET (11:00 GMT)

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