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 increase: 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. Although a brief growth scare in late summer unnerved investors, the U.S. economy ended 2024 on solid footing. Rising investor enthusiasm for the promise of generative artificial intelligence has boosted the stock prices 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 the bull market, it is also a major reason for the surge in U.S. stocks. 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, supporting rising valuation levels.
Savita Subramanian, head of U.S. equities and quantitative strategy at BofA Securities, told Yahoo Finance in December: “Today’s market is 50% asset-light growth companies, technology, health care. , high-margin industries. “And in the 1980s, 70% of that was manufacturing. So I think comparing today’s P/E ratios to historical averages is fraught with problems.”
