Tech Year-End Rally Powers Markets Amid Fed Rate Cut Expectations

The stock market saw a year-end rally for tech companies and other fast-growing businesses, with the tech-heavy Nasdaq Composite up more than 1% in recent trading. Broadcom’s revenue surge and dividend increase last week added to the momentum for tech stocks. A rebound in bond yields has helped drag on stocks sensitive to the near-term economic outlook. The Federal Reserve is expected to cut interest rates later this week, but many expect it to signal a slower pace of cuts going forward.

The S&P 500 climbed along with the Nasdaq, while the Dow bounced between small gains and losses. Broadcom shares extended Friday’s surge, while other chip stocks were mixed: Micron Technology jumped, while Nvidia slipped. Bitcoin climbed to a new record above $107,000. Treasury yields were little changed after a surprisingly intense bond selloff sent yields sharply higher last week. Global markets were broadly lower, with Chinese stocks falling after data showed an unexpectedly sharp slowdown in retail-sales growth.

The Nasdaq hit a record high on Monday and the S&P 500 also rose as investors assessed the latest economic data while awaiting the Federal Reserve’s final policy announcement of the year later in the week to gauge the path of interest rates. Markets have almost completely priced in a rate cut at the conclusion of the Fed’s two-day policy meeting on Wednesday, with a 99.1% chance for a cut of 25 basis points (bps).

On the economic front, S&P Global said its flash manufacturing PMI dropped to 48.3 this month, below the 49.8 reading of economists polled by Reuters and the 49.7 in November. A gauge of factory production hits its lowest level since May 2020 ahead of the prospect of higher tariffs increasing the cost of imported raw materials next year.

The S&P 500 is up 27.5% this year as optimism over growth in artificial intelligence-related companies, the start of the Fed’s rate-cutting cycle, a resilient economy, and expected pro-business policies from Donald Trump’s incoming administration have helped boost equities. The benchmark index is up more than 58% over the past two years, marking its strongest two-year period since a 65.9% surge in 1997 and 1998.

MicroStrategy, a leading bitcoin mining company, has seen its stock gain 3.2%, while MARA Holdings has seen an 8.8% increase. Super Micro Computer, one of the stocks set to be removed from the Nasdaq 100, has tumbled 8%. The S&P 500 posted 14 new 52-week highs and 15 new lows, while the Nasdaq Composite recorded 96 new highs and 160 new lows.

MicroStrategy’s stock gained 4% at market open, thanks to the Nasdaq announcing that the Virginia-based company would join its Nasdaq 100 stock index next Monday. The inclusion on the Nasdaq 100, which is the basis for the popular Invesco QQQ exchange-traded fund, should result in about $2.1 billion in net buying of MicroStrategy shares as portfolios adjust to the move.

MicroStrategy stock has gained a robust 573% in 2024, outstripping bitcoin’s 150% gain and the S&P 500’s 29% return. Shares of the other two new Nasdaq 100 entrants, Axon Enterprise and Palantir, had less stark reactions, with Taser stun gun maker Axon stock up 1% and analytics-based defense contractor Palantir trading flat.

MicroStrategy describes itself as the “world’s first and largest Bitcoin Treasury Company.” Part of the dot-com boom at the turn of the millennium, MicroStrategy shifted its focus since 2020 from its software business to becoming the most prominent voice advocating for bitcoin as a long-term store of value akin to gold. The company owns 439,000 bitcoins in its strategic reserve, equivalent to $46 billion, or 2.2% of the world’s total bitcoin supply. Some 40% of MicroStrategy’s bitcoins have been acquired over the last 40 days, dating back to the election of Donald Trump, an outspoken bitcoin ally.

MicroStrategy has faced criticism from investment firm Citron Research, which announced a short position on MicroStrategy stock last month, calling the stock “overheated” and “completely detached” from bitcoin fundamentals. With a market capitalization of about $100 billion, MicroStrategy trades more than two times higher than its bitcoin holdings, with its other operations hardly offering much further support.

The Dow Jones Industrial Average is trading sluggish on Monday, stuck near 43,800, as markets await what is broadly anticipated to be the Fed’s last rate cut of 2024. Increases in telecoms and retail stocks have offset declines in key tech and health stocks.

US Purchasing Managers Index (PMI) activity figures came in mixed on Monday, with the US Services component accelerating to its highest print in just over three years while the Manufacturing component eased back further into contraction territory. December’s US Services PMI confidence survey results showed aggregated expectations for business activity have risen to 58.5, the highest level since November of 2021. On the Manufacturing PMI side, business expectations declined more than expected, falling to 48.3 compared to the anticipated 49.4 and last month’s 49.7.

This week’s Fed meeting carries additional weight, as the US central bank will also be updating its ‘dot plot’ of interest rate expectations. Traders widely expect the Fed to reduce its policy rate by 25 bps to 4.5%.