The performance of the U.S. stock market in 2023 has raised eyebrows among investors globally. The Dow Jones Industrial Average, for instance, reflects an uptick of around 3.84%, while the NASDAQ Composite Index is up approximately 3.37%. Despite this modest growth, the indices seem to be stuck around the 20,000-point mark, showing signs of volatility and stagnation. This situation comes at a time when many prominent companies within the revered technology sector, often referred to as the "Magnificent Seven," are struggling to maintain their upward trajectory. Moreover, there's a notable concentration of trades within the stock market, reflecting a cautious approach among investors. The recent policies proposed by President Biden, as well as Elon Musk's multifaceted strategies, have further muddied the waters, compelling investors to weigh the risks involved with a fluctuating policy environment.

Amidst these developments, the discourse around whether the U.S. stock market has peaked or if a significant correction is imminent has ramped up significantly. Investors are keenly watching these trends, trying to decipher the next steps to take in a landscape that is anything but definitive.

Citigroup, a well-known investment bank, has adopted a more reserved stance. Recent comments from their strategists suggest that the current risks tied to President Biden's proposed policies could mean that the gains seen in U.S. stocks may very well be the best that can be achieved in the near-term. Led by Scott Chronert, the analysis points to a curious juxtaposition: while investors are betting on the positive effects of the “America First” policies to bolster corporate health, Chronert's team cautions that the potential disruptions these policies could impose on the fundamentals may not yet be reflected in stock prices. While they maintain a stable outlook for the entire year, they do acknowledge an uptick in short- to medium-term downward risks.

The crux of the market's underperformance seems to center around investors' anxiety regarding the President's protectionist stance as well as the proposed tariffs on imports. There is a growing fear that these moves could ignite inflation, a concern that weighs heavily on investor sentiment. Coupled with the skepticism surrounding the inflated valuations of technology giants, the mood becomes increasingly tense. Apple, Tesla, Alphabet, and Microsoft, four of the seven mega-cap companies, are currently witnessing a downturn in their stock prices, marking a stark contrast against their late 2023 peak values. The influence of these giants on profit growth has also shown signs of deceleration. According to Chronert's team, the rising momentum is emerging from other components of the S&P 500 index, indicating that the buoyancy is potentially spreading beyond the large cap tech landscape, albeit primarily to other sizable firms.

Meanwhile, doubts have been raised concerning the rapid advancements in artificial intelligence (AI). Goldman Sachs' macro research division has highlighted a poignant query: is the capital poured into AI excessive relative to the limited returns generated? This question brings to light a critical reality: analyzing the current landscape, it seems that AI investments are largely viewed as capital expenditure endeavors. Companies like NVIDIA, which provide foundational AI technologies, have seen their stock prices soar beyond those of traditional tech firms. In fact, projections suggest that tech giants are set to invest over a trillion dollars in AI capital expenditures in the coming years. However, empirical data substantiating robust ROI from these investments remains scant.

This report, published in 2024, has generated additional scrutiny in light of the entrance of AI competitors into the market, notably with DeepSeek making waves at the start of 2025. Given the dominance of a few AI tech firms over the U.S. market, these concerns may affirm rising apprehensions shared by investors regarding the future of U.S. stocks. Yang Delong, a noted economist and advisor to a major research center, has openly expressed concerns that 2025 could see the market peak, echoing sentiments held by renowned investors like Warren Buffett. Historical patterns reveal that Buffett scaled back on significant stock positions right before major market peaks; such cautionary behaviors suggest a prudent investment outlook as the current bullish market has persisted for more than three years in an immediate sense, and over a decade from a broader perspective.

Yang Delong posits that the ascendancy of the seven major tech stocks is the primary driver behind stock market gains. However, with these stocks at dominating historical high valuations, the possibility of delivering the expected promises of AI applications remains uncertain, leading him to warn about the risks of a substantial correction in tech stocks come 2025, and advises investors to be cautious.

Contrasting views have emerged from various analysts. For instance, a report from Ping An Securities has highlighted that the current U.S. market valuations stand at historically elevated levels, ranking third-highest in recent history, preceded only by valuations at the close of 1999 and 2021. Each past peak has been followed by substantial market corrections. Nevertheless, it is critical to underline that high valuation does not inherently translate to a market bubble; a contextual evaluation of the valuations’ validity is integral. Taking into account factors such as earnings performance, IPO activity, and the equity-bond performance ratio, they conclude that signs of a significant devaluation are currently undetectable.

However, they also underscore that macroeconomic uncertainties heading into 2025 are on the rise. Policies enacted by the Biden administration have the potential to exacerbate inflation, which poses a formidable threat to U.S. equities. Notably, since 2022, there has been an observable sensitivity in U.S. stocks to inflation; corrections have been frequent when inflation rates have soared or slow to decrease. Additionally, the adverse fallout from tariffs and protective trade policies might become amplified, further exposing U.S. technology enterprises to global economic dynamics, which could pose challenges in their trade relationships outside of the U.S. Furthermore, the pressures surrounding the U.S. fiscal landscape and debt sustainability remain a vital risk that the stock market must confront. The effectiveness of the newly appointed treasury secretary in alleviating these fiscal pressures will take time to ascertain.

As investors become increasingly attuned to macroeconomic risks, this may exacerbate market volatility. Ping An Securities maintains a cautiously optimistic view for the U.S. market heading into 2025, but they also advise investors to prepare themselves for potential policy-induced market fluctuation and volatility.

Highlighting an interesting perspective, a recent dialogue between Nicolai Tangen, the CEO of Norway's sovereign wealth fund, and Anthony Bolton, the former president of Fidelity International, renowned as the "father of contrarian investing," posed intriguing questions regarding the merits of investing in U.S. versus Chinese markets. Bolton expresses that the most promising contrarian investment today would be in China, considering that almost all other markets are trading at all-time highs, while China is approaching a low-point. He believes we are on the cusp of a new bull market in China. The effectiveness of contrarian investing lies in its unique nature; few venture to tread this path. As Bolton aptly captures, the danger in the stock market is when everyone follows the same trend, which may yield temporary success, but eventually leads to an inevitable market correction.