As President-elect Donald Trump prepares to begin his second term, investors are debating how his proposed policies will play out in the stock market. While the answer may be unclear, what is evident is the remarkable position the market is in as he takes the helm of the state.
First, 2024 marked the second year in a row that the S&P 500 (^GSPC) increased by more than 20%, which has not been seen since 1997-1998.
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There were several reasons for the huge gains: The Federal Reserve cut interest rates for the first time in about four years in 2024, followed by two more cuts, effectively reducing borrowing costs, which is good for both businesses and consumers.
Growth in company earnings accelerated during the year. In spite of the brief growth panic that spooked investors in the late summerthe US economy ended 2024 on solid footing. And enthusiasm over the potential of generative artificial intelligence has ignited among investors, giving AI darling Nvidia a boost (NVDA) and his “The Magnificent Seven” peers.
Zooming in on the increase, most of last year’s gains were the result of just a handful of players. In fact, the S&P 500 has never been this concentrated, with the top 10 stocks in the index making up almost 40% of the index. Many of these stocks, which include “The Magnificent Seven,” they have brought in the lion’s share of the profits in the last two years.
While many called the S&P 500 a concentration key risk for a bull marketit is also the main reason why US stocks have soared. Large-cap tech earnings largely outperformed the other 493 companies in the S&P 500, supporting investors’ bias toward America’s biggest tech names.
Meanwhile, the S&P 500’s current high of 21.5 forward 12-month price-to-earnings ratio, according to 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 valuation was higher than this level only during the post-pandemic boom of 2021 and the dot-com bubble.
Several Wall Street strategists noted that the index’s increasing bias toward large technology companies supports elevated valuation levels.
“Today’s market, 50% of it is low-growth companies, technology, healthcare, higher-margin industries,” Savita Subramanian, head of equity and quantitative strategies at Bank of America Securities he told Yahoo Finance in December. “Whereas in the 80s 70% of that was manufacturing. So I think comparing today’s multiple to the historical average is fraught with problems.”
