Trump's First Day: A Mixed Bag for U.S. Stocks

As President Donald Trump took office on January 20, 2025, investors eagerly awaited his policies and their potential impact on the U.S. stock market. The S&P 500(^GSPC 1.00%), a widely followed barometer of the U.S. stock market, had already gained 23% in 2024, fueled by enthusiasm about artificial intelligence, cooling inflation, and strong economic growth. However, the market's reaction to Trump's inauguration was mixed, with some sectors and stocks performing well while others struggled.



One of the key factors driving the market's performance during Trump's first term was his signature legislation, the 2017 Tax Cuts and Jobs Act. This legislation reduced taxes for both individuals and businesses, promoting economic growth and contributing to the strong performance of the S&P 500 during his first term. The U.S. gross domestic product (GDP) increased at an annualized rate of 2.7% from 2017 to 2019, surpassing the average of 1.5% seen in the previous decade (YCharts, The American Presidency Project).

However, the valuation of the S&P 500 changed significantly during Trump's first term. When he first became president in 2017, the S&P 500 had a forward price-to-earnings (PE) ratio of around 17, which was a relatively modest valuation. However, as of Dec. 20, 2024, the S&P 500 had a forward PE ratio of 22.2, indicating that the market had become much more expensive during his first term.

This change in valuation has several implications for future returns. First, a higher PE ratio suggests that investors are paying more for each dollar of earnings, which can lead to lower future returns. According to Apollo Global Management Chief Economist Torsten Slok, the current forward PE multiple of 22.2 implies an annualized return of only 3% over the next three years.

Second, the S&P 500 is now trading at a valuation that is higher than it has been for most of the past four decades, with only two exceptions: the dot-com bubble and the early stages of the COVID-19 pandemic. In both of those cases, long stretches of gains ended with steep pullbacks, suggesting that the current valuation may be unsustainable.

Finally, the fact that Trump is inheriting a much more expensive stock market this time around suggests that the S&P 500 may perform much worse during his second term than it did during his first term. Investors should be prepared for this possibility by tempering their expectations, paying attention to valuations, and building larger-than-normal cash positions in their portfolios.

In conclusion, Trump's first day in office was a mixed bag for U.S. stocks, with some sectors and stocks performing well while others struggled. The strong performance of the S&P 500 during Trump's first term was driven by factors such as the Tax Cuts and Jobs Act, strong corporate earnings growth, and a resilient labor market. However, the market's valuation has become much more expensive during his first term, which may lead to lower future returns and a potential pullback in the market. Investors should be prepared for this possibility by staying informed about the market's valuation and maintaining a healthy cash position in their portfolios.