The stock market has never looked like this before – regardless of who is president

As President-elect Donald Trump prepares to begin his second term in office, investors are debating how his proposed policies will play out in the stock market. While the answer may be unclear, it is clear the remarkable position the market is in when he takes the helm of the country.

First, 2024 marked the second year in a row that the S&P 500 (^GSPC) rose more than 20%, a feat not seen since 1997-1998.

There were a few reasons for the massive gains: The Federal Reserve cut interest rates for the first time in about four years in 2024 and followed with two more cuts, effectively lowering borrowing costs, which is good for both businesses and consumers.

Growth in corporate earnings accelerated during the year. Despite a brief growth scare that spooked investors in the late summer, the US economy ended 2024 on solid footing. And enthusiasm over the prospects of generative artificial intelligence ignited among investors, giving a boost to AI darling Nvidia (NVDA) and its “Magnificent Seven” peers.

Zooming in on the rally, much of last year’s gains were driven by just a handful of players. In fact, the S&P 500 has never been so concentrated with the top 10 stocks in the index make up almost 40% of the index. Many of these 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 has also been a major reason why US stocks have rallied sharply. Large-cap tech earnings have 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 valuation, which sits at a 21.5 forward 12-month price-to-earnings ratio, as of fact set, 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 during the 2021 post-pandemic boom and dot-com bubble.

Several Wall Street strategists have pointed out that the index’s increasing tilt toward large technology companies supports the elevated valuation levels.

“Today’s market, 50% of it is asset-light growth companies, technology, healthcare, higher-margin industries,” Bank of America Securities head of U.S. equity and quantitative strategies Savita Subramanian told Yahoo Finance in December. “Whereas back in the 80s, 70% of that was manufacturing. So I think the exercise of comparing today’s multiple to historical averages is fraught with problems.”

The story continues

All in all, it looks to be a banner moment for stocks. But it’s unclear whether market optimism will continue, especially as investors question how much further the Fed will cut interest rates in 2025 — or whether the central bank will cut borrowing costs at all.

Given that U.S. stock valuations are already rich, UBS Wealth Management’s Evan Brown told Yahoo Finance at his 2025 Outlook Roundtable that “it won’t take much” to change the widely held belief that the U.S. economy and stocks will outperform the rest of the world in 2025.

A key variable in where the markets are headed is, of course, Trump himself. While stocks rose to new highs after the November election, economists have recently said some of the policies he has proposed, such as higher tariffs and mass deportations, could keep inflation high.

The details of these policies are still unknown. But when they are actually passed, they will come against a stock market backdrop that many have wondered about – and one that could be ripe for change.

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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