22 January Stock Market Outlook: S&P 500 Surges 20% for Two Consecutive Years
Investors are discussing how Donald Trump‘s proposed policies would affect the stock market as he gets ready to start his second term in office. The answer may be ambiguous, but it is clear that the market is in a remarkable position as he assumes leadership of the nation. First, the S&P 500 increased by more than 20% for the second year in a row in 2024, which hasn’t happened since 1997–1998.
The enormous advances have several causes: For the first time in about four years, the Federal Reserve lowered interest rates in 2024. Two more reductions followed, thereby cutting borrowing costs, which benefits consumers and businesses alike. Throughout the year, the increase of corporate earnings surged. In late summer, investors were alarmed by a brief growth concern, but the US economy closed 2024 on a strong note. Additionally, investors became really excited about the potential of generative AI, which helped Nvidia and its Magnificent Seven partners gain traction.
Tech Giants Lead the Bull Market: The Magnificent Seven’s Dominance
Focusing on the rally, a small number of players were responsible for a large portion of the gain from the previous year. Since the top 10 stocks account for almost 40% of the index, the S&P 500 has never been this concentrated. Many of those equities, including the Magnificent Seven, have contributed most of the gains in the last two years.
The concentration of the S&P 500 has been a big risk to the bull market, but it has also contributed significantly to the rise in US stocks. Investors’ preference for America’s biggest tech companies has been reinforced by the fact that large-cap tech earnings have significantly exceeded S&P 500 results from the other 493 companies. The current high valuation of the S&P 500, according to FactSet, is 21.5 ahead of the 12-month price-to-earnings, which is significantly higher than the 10-year average of 18.2 and the five-year average of 19.7.
Today’s market, 50% of it is asset-light growth companies, tech, healthcare, higher-margin industries. Whereas back in the 80s, 70% of it was manufacturing. So I think the exercise of comparing today’s multiple to historical averages is fraught with problems.
Bank of America Securities head of US equity and quantitive strategy Savita Subramanian
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