As President-elect Donald Trump prepares to begin his second term, investors are discussing how his proposed policies will play out in the stock market. While the answer may not be clear, what is clear is that markets were prominently positioned during his time in charge of the country.
First, 2024 marks the second consecutive year that the S&P 500 Index (^GSPC) has gained more than 20%, a feat not seen since 1997-1998.
Deadline: January 17, 5:11:45 pm ET
There are several reasons for the sharp rise: The Federal Reserve cut interest rates for the first time in about four years in 2024, followed by two more cuts, effectively lowering borrowing costs, which is good for both businesses and consumers.
Corporate profit growth accelerated during the year. Despite a brief late-summer growth scare that unnerved investors, the U.S. economy ended 2024 on solid footing. Rising investor enthusiasm for the promise of generative artificial intelligence has boosted shares of AI darling Nvidia (NVDA) and its "Big Seven" peers.
Zooming in, most of last year's gains were driven by a handful of players. In fact, the S&P 500 has never been more concentrated, with the top 10 stocks accounting for nearly 40% of the index. Many of these stocks, including the "Big Seven," have driven much of the gains over the past two years.
While many call concentration in the S&P 500 a major risk in bull markets, it's also a major reason why U.S. stocks are surging. Big Tech's earnings performance far outperformed the performance of the other 493 companies in the S&P 500, supporting investor bias against the largest U.S. tech companies.
Meanwhile, the S&P 500's current high valuation is a forward 12-month price-to-earnings ratio of 21.5, well above the five-year average of 19.7 and the 10-year average of 18.2, according to FactSet. The S&P 500 is valued at 21.5, a level it has only been above during the 2021 post-pandemic boom and the dot-com bubble.
Several Wall Street strategists pointed to the index's increasing tilt toward large technology companies, which is supporting rising valuation levels.
“Today’s market is 50% asset-light growth companies, technology, health care, High-margin industries. "And in the '80s, 70% of that was manufacturing. So I think comparing today's P/E ratios to historical averages is fraught with problems."
All in all, this appears to be a signature moment for the stock market. But it's unclear whether the market's optimism will last, especially as investors question how much further the Fed will cut interest rates in 2025 or whether the central bank will lower borrowing costs.
UBS Asset Management's Evan Brown told Yahoo Finance's 2025 Outlook Roundtable that "it wouldn't take much" to change the consensus view of where the U.S. economy and stocks will be given their already lofty valuations. The belief in outperforming the rest of the world. 2025.
Of course, a key variable in the direction of the market is Trump himself. While stocks surged to new highs after his election in November, economists have recently said some of his proposed policies, such as higher tariffs and mass deportations, could lead to higher inflation.
The details of these policies remain unknown. However, once they are actually enacted, they will face a stock market backdrop that many will marvel at, and may be ripe for change.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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