The S&P 500's post-election rally, fueled by optimism surrounding Donald Trump's re-election, is showing signs of fading. The index, which surged to a record high the day after the election, has since given back much of its gains. As of Dec. 20, 2024, the S&P 500 is up just 2.5% year-to-date, far below the 26% gain it posted in 2024.



The market's initial enthusiasm was driven by expectations of continued deregulation, tax cuts, and infrastructure spending under a second Trump administration. However, investors are now grappling with the reality of a divided government and the potential for gridlock, which could hinder the implementation of Trump's policy agenda.



Moreover, the S&P 500's current valuation is raising concerns. With a forward price-to-earnings (PE) ratio of 22.2, the index is trading at an expensive level compared to its historical average and previous periods. This high valuation implies that investors are paying more for each dollar of expected earnings, which can lead to lower future returns.

Apollo Global Management Chief Economist Torsten Slok estimates that the current forward P/E value of 22.2 implies an annualized return of only 3% over the next three years. This is a significant slowdown from the S&P 500's performance under Trump's first term, when it returned 14.1% annually.

Investors should be prepared for potential market turbulence and consider adjusting their expectations for future returns. Building larger-than-normal cash positions in their portfolios can help them capitalize on any future drawdowns or market corrections, which have historically occurred about once every two years and once every six years, respectively.

Diversifying portfolios and staying informed about policy changes can also help investors navigate the market's ups and downs. Trump's second term may bring significant changes in tax, trade, and regulatory policies, which could impact different sectors in various ways. For example, Trump's proposed tariffs on Chinese goods could negatively impact companies with substantial business outside the U.S., while his deregulation efforts could benefit sectors like energy, financial services, and pharmaceuticals.

In conclusion, the S&P 500's post-election rally is fading fast, and investors should be prepared for potential market turbulence under Trump's second term. By tempering their expectations, paying attention to valuations, and building larger-than-normal cash positions, investors can better navigate the market's volatility and capitalize on opportunities as they arise.