The stock market’s stagnant start to 2025
Two months into 2025 and a palpable sense of disquiet seems to have settled over equity markets. Far from the jubilant ascents of the previous two year, the stock market’s performance this year has been a sobering affair, marked by a notable absence of vigour.
The technology sector – a linchpin of the market hitherto vitality – suffered more than a hiccough earlier this week, when the S&P 500 relinquished 1.76 per cent of its market value in a single session. Semiconductor stalwarts such as Nvidia (NASDAQ:NVDA) and Broadcom (NASDAQ:AVGO) bore the heaviest toll.
These are businesses feeding the artificial intelligence (AI) beast – an animal that is yet to demonstrate any step change in revenue from the introduction of AI-enhanced products and services.
Monday’s decline reflected the consequences of President Trump’s renewed tariff offensive. With threats of escalated duties on China and novel levies against Canada and Mexico poised to materialise on Tuesday, investors are grappling with economic disruption.
Of those trillion-dollar mega cap technology stocks, only Meta Platforms (NASDAQ:META) has defied the year’s downward pull on technology names with a nine per cent gain for calendar 2025. Meanwhile, Apple languishes with a two per cent decline, Microsoft is down seven per cent, and Tesla has plunged 25 per cent surrendering its trillion-dollar mantle. Even Nvidia, a darling of recent years with gains of 171 per cent in 2024 and 239 per cent in 2023, is now contending with a 15 per cent retreat in 2025.
Back in 2023 and 2024 we wrote that the issue for the rally in the AI-downstream mega caps would ultimately be the development or absence of substantial revenue models from their AI investments.
In July 2023, I wrote, “There’s little doubt AI is beginning to reshape our digital landscape, but at the moment, AI remains something of a novelty, much as the release of Apple’s App Store saw everyone turn their iPhones into a torch.
“Companies like Meta and Google are driving to integrate AI into everyday applications while ensuring it’s anchored in security. These don’t initially appear to be revenue-enhancing. And wider adoptions may only benefit the consumer more than the companies offering AI enhancements.
“The wide divergence between the booming share prices of Nvidia’s major customers and pretty much every other stock will need to be supported by more than hype. In the absence of a price-to-earnings (P/E) re-rating across their market, substantial growth in revenue and profits will be essential to sustain the heady gains recently experienced. And so far, there’s little being said about revenue to justify the enthusiasm.”
So, what else is holding the S&P 500 back from a rally?
Tariffs are clearly part of the story, stirring up plenty of uncertainty. But there’s more – economic growth has slowed, with quarter one of 2025 gross domestic product (GDP) forecasts hovering around a modest two per cent, per the Federal Reserves (Fed’s) estimates. Inflation’s still hanging around too, keeping the central bank on edge and hinting at tighter policy ahead. Some even suspect the Fed might get tougher to counter price pressures tied to those tariffs, which only muddies the outlook further.
The sluggishness isn’t just in stocks, either – it’s hit cryptocurrencies, which you’d think would thrive under Trump’s deregulation push. His weekend talk of a U.S. strategic crypto reserve, proposing a mix of Bitcoin, Ethereum, XRP, Solana and Cardano, as assets the government would hold, sparked a brief wave of excitement, but Monday’s bitcoin drop quickly snuffed that out. Coinbase (NASDAQ:COIN), a key player in the space, took a nearly five per cent hit that day and is down 20 per cent for the year, showing how trade worries might be outweighing any deregulatory boost.
This feels like a far cry from Trump’s early days, when tax cuts and a business-friendly sentiment sent markets soaring. Now, it’s more about caution – global trade tensions, a strong dollar crimping exporter, and a tech sector grappling with its own high expectations.
With just two months into 2025, the S&P 500’s lacklustre pace suggests we’re not in for the nonstop rallies of the past two years. Trade war risks, hints of tighter money, and a shaky tech sector might, as we have suggested several times already, make volatility the name of the game this year.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
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