The US stock market has been growing strongly for two years; will the trend continue under the Trump administration?

The US stock market has appreciated by more than 20% in 2024 for the second year in a row, supported by solid growth in the United States economy, interest rate cuts by the Federal Reserve amid a disinflationary trend, continued enthusiasm about the potential of artificial intelligence and the election of Donald Trump as president, with the Republican's agenda seen as beneficial for the economy and the market by investors.

The S&P 500 index appreciated by 25.7% last year, while the Nasdaq Composite index, of companies operating in knowledge-intensive industries, advanced by 28.6%. The performance of most of the stocks that make up the "Magnificent Seven" group has been exceptional, with appreciations ranging from 171.1% in the case of Nvidia to 12.1% for Microsoft, while the Dow Jones Industrial Average index, which benefits to a lesser extent from the evolution of the big names in technology, had an increase of 12.9%, last year.

Analysts believe that there are important premises for US stocks to continue their growth this year, but the performances of 2023 and 2024 will probably not be repeated, given that overall valuations are high and the transition from the White House and the geopolitical climate bring uncertainty among investors. On the other hand, the current environment may favor "value" stocks and those in cyclical sectors, which have been in the background for the past two years.

• Florian Munteanu: "Markets tend to rise or correct more than would be justified by economic fundamentals"

Florian Munteanu, an investment consultant with extensive experience in finance and energy, draws attention to the fact that the valuation of the S&P 500 index, whose Shiller P/E ratio stood at around 37 at the end of last year, well above the historical average of 17, is being massively inflated by "magnificents", otherwise the valuations of American stocks being reasonable.

The consultant told us: "The international situation is currently marked by the transition from the White House, where Republican Donald Trump is returning. The expectations are that Trump will be a catalyst for the stock markets as he was in his first term, something that is already manifesting itself in the market, where we see that valuations are at very high levels, especially for "hot" sectors. For example, Tesla's valuation has almost doubled in the last two months, amid expectations that Elon Musk will benefit from the role played in Trump's election. On the other hand, from his first term, we learned that Trump is a very unpredictable president, and those around him can very easily fall out of favor with him".

Florian Munteanu added: "The composition of the S&P 500 index is currently very concentrated around the "magnificent seven", which represent about a third of the capitalization, while the remaining two-thirds are given by the shares of 493 companies. This greatly increases the index's valuation, because the "magnificents" are practically valued for perfect execution. But without them, the United States market is not excessively expensive, but rather in a reasonable range. Therefore, I think it is possible that this year the technology sector will record some severe corrections, while other sectors will maintain their current levels or perform. A situation somewhat similar to that of 2001, when the Nasdaq fell extremely much, while the Dow Jones had a significantly smaller correction".

The consultant advises investors to be cautious, especially regarding the so-called "hot" sectors, which are based on momentum (n.r. impulse). "Markets tend to grow or correct more than would be justified by economic fundamentals, which is called the "momentum factor". This is, in my opinion, perhaps the most important risk but also the biggest opportunity for 2025", concluded Florian Munteanu.

• Adrian Mitroi: "I think Europe will be the big loser of 2025"

Adrian Mitroi, CFA analyst and behavioral finance professor, believes that US stocks are expensive, but they still have growth potential primarily due to the political factor.

"The average correlation coefficient between stocks and bonds is currently somewhere around 0.6. It is quite high, but it still offers investors a decorrelation advantage, so that the combination of stocks and bonds remains in theory and in practice the optimal approach for the very complicated years ahead. The difference will be made by the allocation between the two asset classes," Adrian Mitroi told us.

The analyst believes that "value" stocks were despised by the market last year, while growth stocks were highly appreciated, which caused the S&P 500 index to increase by over 20%. "From my point of view, the United States is the clear political winner of this period, so even if the American stock market is expensive by any standard, it still has potential, primarily due to an impeccable political set-up," the behavioral finance professor told us. In contrast, Europe is in a chronic leadership deficit, completely dysfunctional and unprofitable for the economy, the analyst believes: "I think Europe will enter a substantial shadow cone on all levels - economic development, stock market investments, bond investments, and will be the big loser of 2025."

Adrian Mitroi concluded: "Therefore, I would stay away from any European asset and focus on the United States. I think a good period will come for American bonds because, in the period of global stagflation we are in, bonds represent the refuge of institutional investors. I also think a mediocre but still positive period will follow for American stocks."

• Edward Jones: "US growth has the potential to accelerate again in the second half of the year"

The US stock market will likely continue its rise this year, but yields will fall and volatility will increase, according to the team at financial services firm Edward Jones Investments.

"Bull markets do not die of old age. Historically, a recession, interest rate hikes by the Federal Reserve or an external shock such as a pandemic have ended them. While the latter is difficult to predict, we do not see an economic recession on the horizon or a resumption of Fed monetary tightening," strategists wrote in their outlook report for this year.

In their view, US economic growth is likely to moderate slightly in the first half of the year, perhaps to 1.5%-2%, but has the potential to reaccelerate in the second half, thanks to two key elements:

- lower interest rates, which should be seen in the real economy by the end of 2025, supporting household and corporate consumption;

- Trump's proposed pro-growth policies, including deregulation and tax cuts, which should take shape by the end of the year, which can stimulate consumption and positive sentiment in financial markets.

Consumption will remain robust in the United States this year, supported by a healthy labor market, while lending standards are easing and manufacturing may recover in 2025. All this in the context of the Fed trying to gradually remove restrictions imposed on the economy and bring the interest rate to a neutral position, according to Edward Jones.

"We believe the Fed will continue its rate-cutting cycle in 2025," wrote strategists, who believe the US central bank will cut interest rates two to three times this year, bringing the federal funds rate to a range of 3.5% - 4%, compared to 4.5% currently.

• More sectors to support market appreciation, financial services firm says

Unlike the past two years, when big tech stocks were the engine of U.S. indexes' gains, more sectors will support market growth in 2025 as investors seek greater domestic exposure, according to Edward Jones Investments.

Strategists say there are three reasons why there are opportunities to invest in value and cyclical companies this year:

- expectations for strong corporate profitability growth in these sectors;

- value stocks are less sensitive to trade policy uncertainties because their revenues are generated domestically, compared to about 50% for growth companies;

- cyclical sectors, such as financials and industrials - which together account for nearly 40% of the S&P 500 - may benefit from the deregulation and pro-growth policies of the incoming White House administration.

• Edward Jones: "We expect S&P 500 earnings to grow 10%-15%"

Despite solid fundamentals, the third year of this bull market may not be as smooth, the Edward Jones team also points out. "Uncertainty regarding trade policies, immigration and tariffs is high; so are expectations related to pro-growth initiatives. Concerns about inflation or economic developments can trigger market pullbacks, which we would try to capitalize on, given that the long-term trend remains intact," the analysts say.

Geopolitical tensions also continue to be a source of market volatility. However, in recent history, this volatility has been short-lived, a situation that is likely to continue barring a major escalation, according to the financial services firm's team.

"We expect S&P 500 earnings to grow by 10%-15%, with the lower end of the range being our base case scenario and the one most likely to occur if policies such as corporate tax cuts are implemented," Edward Jones Investments wrote.

From the beginning of the year until the second half of last week, the S&P 500 index had increased by about 1%. Today, Donald Trump will be inaugurated as President of the United States of America.