Over the last two years, the stock market has grown astronomically; the S&P 500 has risen by nearly 50%, and certain stocks like Nvidia have soared up more than 700%. This dramatic increase in the stock market has drawn interest from old investors and newcomers alike, with everyone wondering what factors contributed to such an abnormal increase.
“This stock market increase has to do more with the dropping interest rates,” AP Economics teacher Paul Chiment said. “[The Federal Reserve] raised interest rates to fight inflation in 2022, which lowers demand for stocks because people are putting all their money in the bank. Once they lower those interest rates, you’re not getting [high bank interest] anymore, so people are more willing to take the risk and put their money into the stocks.”
Interest rate fluctuations play a pivotal role in market trends. The Federal Reserve’s outlined duties, such as raising and lowering interest rates during inflationary periods, have created cyclical effects on investment behavior. These shifts may be a part of broader monetary policy to balance inflation and unemployment.
“Interest rates act like a lever for the economy,” Chiment said. “When rates are high, it’s harder for businesses to borrow money, and consumers often prefer the guaranteed returns of bank interest. When rates drop, that dynamic shifts, encouraging people to seek higher returns in stocks.”
Another prominent driver of recent market gains has been the explosive growth of artificial intelligence.
Companies like NVIDIA and AMD, which produce key hardware for AI applications, have seen their valuations skyrocket.
“I actually saw this coming,” said Math Department Head Erik Faust. “I invested in some AI-related stocks prior to the passage of the CHIPS Act, anticipating increased government spending in the sector. But I also knew there would be some ‘irrational exuberance,’ so I set benchmarks for selling.”
The CHIPS Act, a $53 billion federal investment in semiconductor manufacturing and research, may be a rationale for some AI-related stocks’ growth. Yet analysts are divided on whether these stocks are overvalued or not.
“NVIDIA’s market value is now nearly five times the industry estimate for next year’s global chip sales,” said Eric Savitz, the associate editor at market research and analytics company Barrons.
“Microsoft has seven times the number of employees Nvidia does and twice the sales. Apple has five times the staff and triple the sales volume,” he said.
Nonetheless, this past week, NVIDIA’s market cap vaulted past them both.”
Despite the skepticism surrounding the market cap, NVIDIA reported earnings that beat analyst expectations by 8% in November of this year, which could imply that it is fairly valued.
According to Chiment, the course of action he takes when evaluating a stock is to “talk to a financial advisor. Really do.”
Above all the speculation surrounding AI companies, the industry is undeniably a force for economic change and innovation in the world.
“AI is like the next version of computers—it’s here to stay,” said Faust. “But the current valuations might not hold forever. It’s important to distinguish between genuine innovation and hype.”
While AI has transformed the stock market, Bitcoin’s resurgence has reignited the cryptocurrency debate. After a prolonged slump, Bitcoin rebounded significantly this year, buoyed by growing institutional interest and speculation surrounding the recent election. Bitcoin has surged up more than 155% in 2024 compared to the nearly 60% decline in the two years before that.
“Bitcoin feels more like the dot-com bubble to me,” said Faust. “There’s a lot of excitement driving up prices, but not always with strong fundamentals behind it.”
Regardless of the debate, Bitcoin’s volatility has made it a popular—if risky—choice for younger investors.
At Laguna Blanca, financial literacy is essential to educate well-rounded students. With classes like Personal Finance and AP Macro Economics, as well as other resources like the investment club, students can learn the fundamentals of investing.
“Beginner investors often make the mistake of trying to get rich quick,” said Chiment. “Instead, they should consider an index tracking ETF. For example, the S&P 500 will likely offer more stable returns.”
ETFs, or exchange-traded funds, track the performance of dozens or hundreds of stocks to diversify risk. They are largely considered one of the safest options in the stock market.
In Faust’s words, “Just put your money in ETFs, take advantage of compounding interest, be Warren Buffett.”
Some students take these lessons to heart, while others have discovered profitable strategies of their own.
“I prefer to stick to ETFs and large-cap stocks in order to keep my investments very low risk,” said senior Rio Valle.
On the other hand, junior Fernando Alejandre has developed his own strategy. “I am invested in a large variety of crypto, small and large, which has led to very good returns over the past years.”
