Trump Effect Fuels Wall Street Rally Amid Valuation Concerns and Rising Yields
1min read In recent weeks, U.S. stocks have seen a notable increase as investors place bets on the idea that former President Donald Trump will not allow the stock market to decline. This sentiment is driven by hopes that Trump's policies, particularly his business-friendly stance, will continue to bolster market confidence. The Dow Jones Industrial Average has achieved a record close, marking an impressive weekly gain of 1.96%. Similarly, the Nasdaq Composite rose 1.73%, and the S&P 500 increased by 1.68%, highlighting a positive trend across major indices.
Investors are particularly optimistic about sectors sensitive to economic fluctuations, such as small-cap stocks. The Russell 2000, which tracks small-cap companies, has seen a nearly 2% rise since the election. A significant ETF linked to this index has witnessed substantial inflows, marking the highest levels since June 2007. This enthusiasm extends to other high-risk areas of the market, with heightened activity in call options, driving up their cost.
The focus on U.S. equities is further evidenced by the significant inflow into stock funds, nearly $56 billion in a single week, marking the second-largest inflow recorded since 2008. This surge underscores the investor confidence in a continued bull run stimulated by the post-election market dynamics.
Despite these optimistic movements, some analysts caution that market valuations are reaching elevated levels. The S&P 500's price-to-earnings ratio based on expected earnings over the next 12 months has risen to 22, surpassing the five-year average. This elevation suggests a potential overvaluation, sparking caution among investors regarding a sustained rally.
Bond investors have expressed concerns through rising U.S. Treasury yields, with the benchmark 10-year yield hitting 4.426%. This increase reflects expectations of expanding deficits and rising inflation. Furthermore, Federal Reserve Chair Jerome Powell indicated no rush to lower rates, adding pressure to both bonds and equities.
The current market dynamics reflect an intersection of optimism and caution, with the risk premium of holding stocks versus bonds narrowing significantly. This contraction signals thinning margins for rewards against potential risks, challenging the sustainability of the current upward trajectory.