The stock market continued its upward trajectory this week, hitting another record high despite the Thanksgiving holiday. The benchmark index has now posted gains of roughly 27% for 2024. High-quality companies with strong competitive advantages, known as “moat stocks,” have been leading the rally.
While Nvidia has garnered significant attention, other high-performing companies are also in the mix. Analysts highlight the solid performance of these “moat stocks” throughout the year. In the background, expectations around Federal Reserve policy have been shifting.
Solid economic growth and inflation data have the markets pricing in significant changes. The latest data from the Personal Consumption Expenditures Price Index showed inflation remains above the central bank’s 2% target. The relatively quiet market week saw some excitement from Washington when President-elect Donald Trump announced his intention to impose 25% tariffs on goods from Canada and Mexico, the U.S.’s largest trading partners.
This policy move has been a major talking point among corporate executives during third-quarter earnings calls, highlighting potential impacts on corporate profits, inflation, and market dynamics. One sector under pressure since the election has been those poised to benefit from improving the country’s power grid. Analysts spoke with portfolio managers about potential winners amid rising demand for better infrastructure.
For investors looking for value opportunities, analysts have identified stocks that have recently fallen into undervalued territory. Investors are encouraged to visit market coverage pages for the latest updates and insights. As American investors sit down to their Thanksgiving dinners, many may ponder whether they can continue to profit from a Trump-fueled market boom while also safeguarding against potential risks reminiscent of the dot-com bubble 25 years ago.
With the US stock market experiencing a second year of exceptional gains, it is difficult to bet against the rally continuing into next year and beyond. However, the current high valuations of S&P 500 shares draw uncomfortable parallels to historical bubbles. Investment experts have pointed out that the US stock market represents 60% of global shares’ value, despite the US economy accounting for only 26% of global GDP.
Moreover, the US market’s price-to-earnings ratio of 22.5 is extraordinarily high, not just by global standards but also by historical ones. The market’s current valuation relative to companies’ book values is approaching the lofty heights last seen in 1999. Despite these warning signs, many investors are reluctant to consider that the bull market could be nearing its limit.
Optimism, driven by the perceived benefits of tax cuts and tariffs, dominates the narrative around President-elect Trump.
Moat stocks driving gains in 2024
Yet, the potential downsides—such as inflation and higher long-term interest rates—are often overlooked.
As we approach 2025, the ‘US exceptionalism’ story gains more traction, supported by forecasts of mid-double-digit growth in US corporate earnings next year. American companies are expected to outpace their global peers in both growth and returns on capital. The US economy has been growing faster than other developed economies, and with the risk of recession diminishing, it continues to look robust.
In contrast, Europe faces several cyclical and structural problems, including potential tariffs affecting its critical car manufacturing sector. China, too, has scaled back its growth ambitions, further stabilizing its property market but not anticipating previous levels of growth. In light of these dynamics, it makes sense to maintain some exposure to the US market while limiting risks associated with potentially overvalued stocks.
One promising avenue is investing in smaller US companies, as indicated by the recent performance of the Russell 2000 index, which tracks smaller firms. These companies are often more domestically focused and are likely to benefit significantly from a “Make America Great Again” initiative. Despite lagging behind their larger counterparts, smaller companies have ample potential for catching up.
Alternatively, investors can mitigate risk by choosing portfolios that avoid the most highly valued US stocks. Value-focused US funds or global funds with a valuation or dividend bias are likely to avoid the highly priced tech giants, thereby offering lower-risk exposure. Companies with durable competitive advantages have been driving market gains in 2024.
Year-to-date, wide-moat stocks, as measured by the Moat Index, are up 28.92%, outperforming the broader market, which gained 26.55%. Narrow-moat stocks are up 25.48%, while no-moat stocks lag with a 14.43% gain. In the Wide Moat Composite Index, leading contributors in the year to date are all names tied to the artificial intelligence boom.
Nvidia leads with a 186.70% return, nearly 80 percentage points better than the next-best performer. Nvidia contributed 8.72 of the 28.92 percentage points gained by the Wide Moat Index this year. Analysts have raised their fair value estimate to $130 per share, reflecting optimism about Nvidia’s growth over the next two years as the supply of the firm’s products improves faster than expected.
Other top contributors to the Wide Moat Index include Apple, Meta Platforms, Amazon, and Microsoft. For the Narrow Moat Index, the leading contributors are Tesla, Netflix, Oracle, Exxon Mobil, and Palantir Technologies. Although 2024 has shown a larger margin of moat stock outperformance than usual, wide-moat stocks have historically outperformed the overall market in the trailing one-year, three-year, five-year, and ten-year periods.
The robust performance of these moat stocks, especially those tied to the artificial intelligence sector, underscores the value of investing in companies with durable competitive advantages.
