As President-elect Donald Trump prepares to start his second term in office, investors are debating how his proposed policies will play out within the stock market. While the reply could also be unclear, what’s evident is the remarkable position the market is in as he takes the helm of the country.
For one, 2024 marked the second consecutive yr the S&P 500 (^GSPC) rose greater than 20%, a feat not seen since 1997-1998.
At close: January 17 at 5:11:45 PM EST
There have been a number of reasons for the large gains: The Federal Reserve cut rates of interest for the primary time in roughly 4 years in 2024 and followed with two more reductions, effectively lowering the associated fee of borrowing, which is sweet for each businesses and consumers.
Corporate earnings growth accelerated throughout the yr. Despite a transient growth scare that spooked investors in late summer, the US economy ended 2024 on solid footing. And enthusiasm over the prospects of generative artificial intelligence caught fire amongst investors, giving a lift to AI darling Nvidia (NVDA) and its “Magnificent Seven” peers.
Zooming in on the rally, much of last yr’s gain was driven by only a handful of players. The truth is, the S&P 500 has never been this concentrated, with the highest 10 stocks within the index making up nearly 40% of the index. Lots of those stocks, which include the “Magnificent Seven,” have driven the lion’s share of gains over the past two years.
While many have called the S&P 500’s concentration a key risk to the bull market, it is also been a serious reason why US stocks have soared. Large-cap tech earnings have widely outperformed results from the opposite 493 firms within the S&P 500, supporting the investor bias toward America’s largest tech names.
Meanwhile, the S&P 500’s current high valuation, which sits at a 21.5 forward 12-month price-to-earnings ratio, per FactSet, is well above the five-year average of 19.7 and the 10-year average of 18.2. At 21.5, the S&P 500’s valuation has only been higher than this level throughout the 2021 post-pandemic boom and the dot-com bubble.
Several Wall Street strategists have identified that the index’s increasing slant to large technology firms supports the elevated valuation levels.
“Today’s market, 50% of it’s asset-light growth firms, tech, healthcare, higher-margin industries,” Bank of America Securities head of US equity and quantitive strategy Savita Subramanian told Yahoo Finance in December. “Whereas back within the 80s, 70% of it was manufacturing. So I feel the exercise of comparing today’s multiple to historical averages is fraught with problems.”