The whole world is reaching all-time highs. Here’s what’s driving it

Published Tue, Feb 27 202410:02 AM EST

It's no secret that stocks have been on an upwards tear since the beginning of the year. What may come as more of a surprise, however, is that these global equity gains have extended to regions beyond just the United States. It's been record after record in 2024 for the U.S. major indexes, with both the S & P 500 and the Dow Jones Industrial Average notching new closing highs last Friday. Although stocks have wavered slightly to start the week, the two indexes are respectively up 6.3% and 3.7% so far this year. The tech-heavy Nasdaq Composite has also rallied 6.4%. But 2024's equity gains have spilled over our domestic borders. Last Friday, Europe's benchmark Stoxx 600 index also closed at a new all-time high , while Japan's Nikkei 225 index hit its first all-time high on Thursday since 1989. On the surface, it may seem simple — global stocks are rallying, so there must be one universal driver, right? But the reasoning behind this phenomenon is actually multifaceted, according to Charles Schwab's chief global investment strategist Jeffrey Kleintop. "They're all hitting new highs, but they've got their own reasons why," he told CNBC in a recent interview. AI has propelled the U.S. rally At least in the United States, much of the bull rally has thus far been driven by the artificial intelligence craze and led by technology-adjacent stocks. Just last Thursday and Friday, shares of Nvidia rose nearly 17% following the chipmaker's stellar fourth-quarter earnings report , which blew investor expectations out of the water. Strong underlying economic fundamentals have also underscored the current bull run. "The good news is the economy seems to be avoiding recession, and profit margins remain strong. And the even better news is that inflation seems to be able to come down even though the economy is at full employment," said David Kelly, chief global strategist at JPMorgan Asset Management, in a recent interview. Despite this better-than-expected economic data pushing rate cuts back, the domestic theme of easing monetary policy has also prevailed to boost investor enthusiasm, State Street's chief investment strategist Michael Arone said. Kelly pointed out that the market's sheer ongoing momentum has also helped to bolster its climb upwards. Investors have had to find a home for the large amount of money sitting in short-term accounts, subsequently directing some flows into the equity market. Europe to ease monetary policy The potential rate cuts from the Federal Reserve have helped moderate inflation and eased the dollar, providing historical tailwinds for non-U.S. stocks, no matter the region, Arone said. What's more, other central banks from around the world, including the European Central Bank and Bank of England, are also expected to follow suit with their own rate cuts this year. This would stimulate economies in their own local regions. Kelly also pointed out that overseas markets still stand to benefit from the AI craze, albeit in a more indirect manner since technology stocks don't make up as large of a proportion of their holdings. "The U.S. does have increasing labor supply — got a lot of immigration going on — whereas in Japan, there is no increased labor supply and in Europe, there's very limited increased labor supply. In some ways the need for AI to substitute for labor is probably more pressing in Japan and Europe than it is in the United States," he added. Tighter economic policy boosts Japanese assets What's interesting is that the bull case in Japan seems to be in part fueled by an opposite phenomenon — a central bank that could actually raise rates soon. Unlike other central banks, the Bank of Japan has deliberately kept interest rates low, but will soon be forced to tighten their monetary policy. When this happens, the yen should strengthen and improve shareholder value in Japanese stocks, Arone said. Although rising interest rates are normally counterintuitive to a bull market rally, Kelly pointed out that tighter monetary policy could be "somewhat reassuring" to Japanese investors by providing them with a positive indication that the economy and inflation were finally normalizing. "Negative or zero rates have really enabled Japan to be a place where you borrow, an important source of investment funding with negative interest rates allowing investors to borrow really cheaply but then buy investments in other countries that offer a higher return," Schwab's Kleintop added. "But now, any hikes this year hold the potential to prompt Japanese investors to sell foreign assets and bring them back home, incentivized by a potentially stronger currency, as rates get hiked in Japan." Another major reason behind the exuberance in Japan is the nation's recent crackdowns for companies to adopt more shareholder-friendly policies , Arone said. So stringent is this push to reform that the Tokyo Stock Exchange has threatened to delist companies that don't meet the criteria by a March 2025 deadline, the strategist added. "I do believe that investors anticipate that this will finally unlock some of the value that's trapped in Japan where many of these companies trade far more inexpensively than U.S. stocks," Arone said. He added that South Korea has likewise adopted similar programs in an effort to unlock more shareholder value in their domestic market. If more copycats spring up, this could be yet another catalyst for global equities. Where do we go from here? Arone, the strategist at State Street, believes that the market will continue to be biased to the upside, at least for the next 12 months. He pointed to easing monetary policy, a weakening dollar and moderating inflation as catalysts. "All of that gives you the ingredients you need to push stocks higher — not only U.S. stocks, but global stocks — in the next 12 months or so," he said. To play this theme, Arone said that opportunities have arisen in emerging markets and China, which have so far been a laggard. Any upside surprises could result in modest outperformance, allowing these markets the potential chance to catch up. More specifically, Arone prefers emerging markets in Asia over those in Latin America or Eastern Europe, citing higher growth rates, rising incomes, a growing middle class and increased exposure to global trade as reasons why. Kelly also believes that the market is likely to grind higher, until some external shock puts a pin in the rally. He believes the best way to invest going forward is by diversifying across different equity and international asset classes, with plenty of fixed income alternatives. On the other hand, Kleintop has grown more concerned about the viability of the U.S. rally as earnings seasons passes, especially since he believes that some of the "Magnificent Seven" stocks may be trading above their true valuations. "There's more vulnerability versus other markets that are nowhere near as concentrated," he said. "I think that international stocks — Japan, Europe — have more room to go. The U.S. may run into a few more hurdles here if the outlook for cuts continues to get pushed out as at the same time, economic momentum slows a little bit, as it's widely expected to do." Similar to Kelly, Kleintop recommended a more broad-based approach to playing this global rally. As international equities look poised to outperform in the next cycle, he recommended investors diversify their international exposure to these categories. — CNBC's Fred Imbert contributed to this report.