Last Wednesday marked a historic moment in the financial markets, as technology stocks continued their upward momentum, propelling the Nasdaq Composite Index to exceed the significant 20,000-point threshold for the first timeThis surge was buoyed by an inflation report that aligned with market expectations, strengthening the outlook for a potential 25 basis point interest rate cut by the Federal Reserve at its upcoming December meeting.

Over the past week, the three major U.Sstock indices exhibited mixed performancesThe Dow Jones Industrial Average experienced a slip of 1.82%, closing at 43,828.06 pointsIn contrast, the Nasdaq Composite Index rose by 0.34% to finish at 19,926.72 points, achieving its fourth consecutive week of gainsMeanwhile, the S&P 500 Index declined by 0.64%, settling at 6,051.09 points.

Analysts at Macquarie have expressed concerns over what they perceive as an "overly bullish" sentiment in the U.S

market, recommending clients to start considering defensive stocks as a precautionary measure.

Wall Street strategists project that after a significant rise in the S&P 500 Index in 2024, it may climb an additional 8% by the end of next year.

A look back over the past year reveals a robust performance across American markets, largely propelled by a dramatic rise in technology stocksThe Dow Jones Industrial Average is up 16.29%, the Nasdaq Composite has surged by 32.74%, while the S&P 500 has seen an increase of 26.86% since the beginning of the year.

Recently released data highlights impressive returns from NVIDIA, a leader in artificial intelligence technology, which has achieved a staggering return rate of over 187% since January, accounting for roughly 17% of the total market's gains.

Stock analyst Brian Kalero shared that over the last 18 months, there has been a significant uptick in spending on artificial intelligence by major cloud computing firms and consumer internet companies, which has positively impacted NVIDIA's earnings and valuation

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These companies have indicated that they do not anticipate a slowdown in AI spending until 2025.

However, several banks on Wall Street, including Morgan Stanley, HSBC, and Goldman Sachs, are betting that as investors grow wary of the immense investment gains in technology firms from AI advancements, strong rebounds in U.Sstocks may cool down next yearA collective of ten banks predict an average 8% rise in the S&P 500 Index, forecasting its value to hover around 6,550 points by the end of 2024. This projection falls below the historical average annual return for the index, which sits at approximately 11%.

On the other hand, Deutsche Bank offers a more optimistic outlook, predicting that the S&P 500 Index could reach a target of 7,000 points by the end of next yearChief U.SEquity Strategist Bankin Chada has noted that large-scale stock buybacks are expected to contribute to the index’s recovery

The bank estimates that quarterly buyback volumes are set to increase from the current $275 billion to about $325 billion to keep pace with corporate earnings.

In the coming year, strategists are advising a focus on small-cap and value stocks, which are currently trading at discounts compared to their estimated fair valueThese stocks stand to benefit from changing market dynamics expected in 2025. Conversely, they see limited upside for large-cap and growth stocks.

From an industry perspective, energy, basic materials, and healthcare stocks show promising potential for growthIn their outlook for 2025, they emphasize, "In a market that is gradually becoming overvalued yet displays strong momentum, we believe that portfolio configuration is becoming increasingly important." Investors are encouraged to consider divesting from sectors that are not only overvalued but also expose them to greater downside risks.

As the Federal Reserve prepares for its upcoming meeting this week, investors keenly await guidance regarding prospective interest rate cuts.

According to the CME Fed Watch tool, the likelihood of a 25 basis point cut when the Fed announces its policy decision this Wednesday is a staggering 96%. However, predicting the interest rate trajectory for next year comes with greater uncertainty

Data from the London Stock Exchange suggests that the U.Sfederal funds rate could drop to between 3.8% by December of next year, down from its current range of 4.5% to 4.75%. This figure exceeds the estimates provided in September by approximately 100 basis points.

The economic projections summary released by the Federal Reserve during the meeting will provide clues regarding policymakers’ expectations for the future of interest ratesIn the summary published in September, Fed officials projected a median interest rate of 3.4% by the end of next year.

Federal Reserve Chairman Jerome Powell hinted earlier this month that the U.Seconomy is currently outperforming the Fed's expectations from September, indicating a possible slowdown in the pace of future rate cutsSupportive economic policies and tariffs have fuelled concerns regarding inflation pressures intensifying next year.

Market strategist Carol Schleif from BMO Private Wealth remarked that investors are trying to decipher the Federal Reserve's degree of concern regarding inflation.

In December, the Fed is anticipated to persist with the 25 basis point cut, but the pace of rate reductions is expected to slow significantly in the latter half of next year

Positive changes in the U.Slabor market have begun to emerge as the effects of prior disruptions from hurricanes and strikes dissipate, with the most recent non-farm payroll data exhibiting a marked improvementNevertheless, the overall employment landscape remains challenging, characterized by slight increases in the unemployment rate, decreases in labor force participation, and rising layoffs, suggesting a labor shortfall at relatively low levelsThe November inflation data, although showing a rebound in the CPI, is partly attributed to base effect issues, and the core inflation rate has dropped slightly from 3.33% to 3.319%. While it remains robust, there has not been substantial recovery.

From the perspective of recent Fed officials' comments, a majority believe that the labor market has largely rebalanced and is no longer contributing significantly to rising inflation levelsWhen combined with recent inflation data trends, it seems the downward trajectory of inflation has not ended; instead, the pace of disinflation has fluctuated

As such, with the Fed's focus remaining on employment, November's inflation data is unlikely to hinder interest rate cuts, and the central bank is expected to maintain its course in December.

Looking ahead, the Fed is likely to implement approximately two more rate cuts in the first half of 2025. This is predicated on expected decreases in inflation due to high baseline impacts in early 2024 and the lingering effects of previous policies that have yet to fully materializeHowever, from the second half of 2025 onwards, the effects of expanded fiscal deficits, tax cuts, and enhanced spending efficiency from a new government regime, alongside stricter border controls on labor supply and broad tariffs, are forecasted to heighten inflationary pressures, limiting disinflationary trendsAs a result, the Fed’s rate-cutting strategy may significantly slow down in the latter half of the year.