At the beginning of the New Year, Tony Pasquariello, head of Goldman Sachs' hedge fund business, released his first report of the year, briefly summarizing 18 key 'short observations' from the past year.

Pasquariello pointed out that 2024 is expected to be an outstanding year for the USA stock market in terms of total return and Sharpe ratio, marking the first time since 1998 and 1999 that the S&P 500 Index has achieved total returns exceeding 20% for two consecutive years.

Pasquariello believes that the main driver for the market will shift towards earnings growth next, arguing that the market is overly focused on PE, neglecting PE growth; compared to other markets, the USA market is generally not excessively expensive, especially for technology stocks.

According to Pasquariello, in 2024, the stock prices of the seven major US technology giants soared by 48%, creating an additional $6 trillion in market value. While large tech stocks continue to act as the 'locomotive' of the market, this year's market also showed good breadth (especially in the second half).

The following is a summary of Pasquariello's observations, translated and proofread by AI:

1. Despite numerous challenges, 2024 is an outstanding year for the USA stock market (careful wording was considered here—especially in light of December's weak finish—but it can be said that doubling the long-term average annual return is sufficient to be deemed 'outstanding'). For the major indices, here are their total returns and Sharpe ratios (ranked by the latter):

• S&P 500 Index: +25% / 2.0
• NASDAQ 100 Index: +26% / 1.4
• Dow Jones Industrial Average: +15% / 1.3
• S&P 500 Value Index: +13% / 1.1
• Middle Cap 400 Index: +14% / 0.9
• E-mini Russell 2000 Index: +12% / 0.6

2. This is the first time since 1998 and 1999 that the S&P 500 Index has seen total returns exceed 20% for two consecutive years. Additionally, it is the first time since 1975 and 1976 that the index has had a Sharpe ratio exceeding 2.0 for two consecutive years.

3. In addition to the significant inflow of capital, the fundamental driving forces of the market are also evident: the US economy is stronger than expected; the Federal Reserve cut interest rates by 100 basis points; and structural innovations (such as AI) continue to thrive. However, the reality is much more complex: doubts have repeatedly arisen regarding the sustainability of US growth (most recently in September); the Federal Reserve's policy path is tortuous and differs significantly from initial expectations; and debates about the utility of AI and ROI persist.

4. The expected PE ratio for the S&P 500 Index at the beginning of the year was 19.5 times, rising to 21.5 times by the end of the year. Whether looking at the PE ratio, equity risk premium, cyclically adjusted PE, or most traditional valuation indicators, the market starting point at the beginning of 2024 is objectively high. However, this ultimately did not hinder market growth—if there was any difference, it is that this market rewarded those investors who dared to buy at the peaks.

Next, it is believed that the main driver of the market will shift to profit growth. In this context, three points are proposed:

1. In 2024, profit growth will drive about half of the Index returns.
2. USA investment portfolio strategy predicts an 11% profit growth in 2025.
3. It is believed that the market places too much emphasis on the PE ratio while ignoring the growth of the PE ratio (the latter indicates that, compared to other market choices, the overall USA market, especially in Technology Stocks, is not overly expensive).

USA technology companies continue to attract market attention. After a total return of 55% in the previous year, the NASDAQ 100 Index has risen another 26% this year. For those tracking, this means that the Index has achieved positive total returns in 15 out of the past 16 years. Although relative profit growth may significantly slow down next year, this sector still offers a unique "sword and shield" combination, providing opportunities that are hard to find elsewhere.

In this context, the seven major technology giants (Magnificent Seven) saw their stock prices soar by 48%, creating an additional Market Cap of 6 trillion dollars. Comparing the total Market Cap of these companies (18 trillion dollars) with other overall sectors: the European STOXX 600 Index is 14 trillion dollars; MSCI China is 9 trillion dollars; Japan TPX is 6 trillion dollars. Looking further down, the year-to-date changes (in total return) are as follows:

• NVIDIA: +171%
• Meta: +66%
• Tesla: +63%
• Amazon: +44%
• Google: +36%
• Apple: +31%
• Microsoft: +13%

(The seven major giants of the US stock market lead strongly)

8. Despite a pullback at the end of the year, NVIDIA’s performance is worth special mention because it added 2 trillion dollars in Market Cap. Time and again, NVIDIA has driven the entire market upward—contributing 21% of the rise in the S&P 500 Index (and 26% of the rise in the NASDAQ 100 Index). In short, I have never seen such a large company grow its earnings at such a fast pace, and as a result, its stock price has surged 27,000% over the past decade (equating to an average annual growth of about 75%).

9. At the same time, the market has shown a higher discernment for the returns on long-term growth. For example, some unprofitable technology companies (such as GSXUNPTC +1%) or Biotechnology companies (such as SPSIBI +1%) have performed extremely poorly. Additionally, although there are concerns about bubble risks in certain areas, no excessive behaviors of the same level as in 2021 have emerged in 2024 (such as NFTs, SPACs, and Cannabis).

10. While large technology stocks continue to act as the "locomotive" of the market, this year's market has also shown good breadth (especially in the second half of the year). As shown in the first chart below, all sectors achieved positive returns except one. In this broad rebound, the American Consumer again defeated the bears; Financial and Utility stocks provided momentum that was unimaginable a decade ago; and Industrial stocks were favored due to Electrical Utilities and defense themes.

11. In the post-COVID era, the Options market has played an important role during certain periods this year. Many of us will remember how the VIX Index soared from 15 to 65—only to quickly drop back to 15 just two weeks later. If we learned anything from this lightning-like volatility, it is to better manage tactical risk by using VIX Call Options rather than simply buying S&P 500 Put Options.

12. Despite the increase in US Treasury yields amid a steepening curve, the performance of long-term debt has been better than expected at the beginning of the year (remember that there was considerable concern over the deficit in the fourth quarter of 2023, but since then, the situation has become more severe). Considering the massive auction supply absorbed along the way—and the return of concerns around the "last mile" of US inflation—I consider this a victory for the Bond and Stock markets. However, it is worth noting that the relative stability of 2024 does not mean that 2025 will be equally stable, especially given the expected surge in US interest rates in the fourth quarter of 2024 (along with an increase in term premium).

13. The dollar finishes this year at a high point. Against the backdrop of outstanding asset returns, healthy capital flow, and reasonable available yields, all of this passes the common-sense test. Again, it is emphasized that no major macro trends will be challenged in the new year, especially in the context of a new round of federal policy implementation.

14. I also want to express appreciation for Bitcoin: after rising 157% the previous year, it has risen another 120% this year. Just two years ago, Bitcoin fell below $16,000 due to the SBF incident, and now it can be said that Bitcoin has initially established its position as a digital store of value. Although its price volatility still relies on the flow of loose capital—I believe it is essentially a liquidity sponge—this asset class's credibility increases slightly each year.

15. Is 2024 a year of American exceptionalism? Yes. Is it the only game in town? No. For example, Chinese Stocks have performed well (Shanghai Composite Index +19%), Taiwan is a star (Taiwan Weighted Index +32%), India has retreated somewhat (India NIFTY +10%), and South Korea has performed weakly (South Korea KOSPI -10%).

16. This year, Japan has experienced a peculiar but strong year (Nikkei 225 Index +21%, TSE Index +20%), with Japanese government bond yields closing at a high. In this mix, some specific Sectors provided outstanding returns: large Banks up 64%, and the Defense Sector up 56%. While this is an appealing set of opportunities, two facts need to be pointed out that raise questions about scale:

1. Most of the strong performance this year occurred in the first half, particularly in areas such as Semiconductors;
2. As a developed stock market that has existed for nearly 150 years, Japan's market experienced a sharp 12% drop one night in August.

17. Regarding the European stock market, I maintain a cautiously optimistic attitude. The total return of the Stoxx 600 Index was 10%. More impressively, the German DAX Index rose by 19%, nearing historical highs. Although I firmly oppose the popular saying in the first quarter every year that 'European stocks are cheap,' I have identified high-quality Stocks in some sub-sectors.

18. A final observation: once again, this point-by-point review greatly underestimates the difficulty of navigating the path. Remember the inflation pressures in April? Remember the situation when the Sahm rule was triggered in July? Remember how you felt when you picked up the phone on the morning of August 5? Remember the shock when NVIDIA fell 14% in the first week of September? Although these moments are worth noting, ultimately, investors stuck to the main trend of the USA stock market and successfully navigated the market's volatility. Thanks to the high-quality opportunities presented in 2024, I believe 2025 will be a different kind of year; despite ongoing challenges, it will offer some very interesting 'hunting' opportunities for stock traders and macro traders.