The start of President Donald Trump’s second term has fueled a vigorous rally, propelling the S&P 500 to new record highs and pushing market valuations to notable extremes.
This surge has prompted investors to consider whether there are more affordable alternatives to the prominent megacap technology stocks, which may still benefit from the president’s initial policy moves.
As of this week, the forward price-to-earnings (P/E) ratio of the S&P 500 climbed above 22, nearing its highest level in nearly four years. The last time it crossed this threshold was in November, when it reached 22.34—the peak since December 2020, according to Dow Jones Market Data.
The P/E ratio, a metric that compares a company’s stock price to its earnings per share, signals how expensive a stock might be relative to its profitability. A high P/E can indicate overvaluation and caution investors to tread carefully.
JPMorgan Chase CEO Jamie Dimon highlighted these valuation concerns, noting that current asset prices rank among the top 10-15% in historical terms, appearing “kind of inflated by any measure,” he told CNBC at the World Economic Forum in Davos, Switzerland.
Given these elevated levels, market analysts suggest that investors look toward less speculative but fundamentally strong opportunities poised to thrive under Trump’s policies, supported by a robust U.S. economy and growing enthusiasm for artificial intelligence.
Exploring Quality Alternatives
Mark Luschini, chief investment strategist at Janney Montgomery Scott, pointed out that the “Magnificent Seven” megacap stocks may remain leaders, but the broader market—the “S&P 493”—presents compelling prospects as earnings growth in these lagging stocks is expected to accelerate.
Promising Sectors:
- Financials: The financial sector remains attractive, bolstered by expectations of increased bank loan activity and growth in mergers, acquisitions, and IPOs. This sector, which gained significantly in 2024, continues to benefit from Trump’s deregulatory stance aimed at fostering financial industry expansion.
- Industrials: Industrial stocks are gaining momentum, with Wall Street anticipating double-digit earnings growth in 2025. Additionally, economic stimulus measures in China are expected to support companies within this cyclical sector.
- Utilities: The utilities sector also looks promising, supported by the administration’s $500 billion Stargate initiative aimed at boosting AI infrastructure, which is projected to drive a surge in electricity demand.
High Valuations Persist for Big Tech
Despite their elevated valuations, megacap tech stocks are likely to remain a key driver of market gains in 2025. The “Magnificent Seven” are projected to sustain rapid earnings growth, although at a slightly slower pace than in previous years.
According to Luschini, while megacap tech remains attractive, the broader market’s expected earnings growth of 15% in 2025 must materialize for stocks to advance. This growth is particularly critical given that market multiples are starting the year at historically high levels.
Katie Nixon, CIO at Northern Trust, warns that the lofty valuations may face headwinds from higher interest rates, potentially tempering gains from earnings growth.
Market Snapshot
As of Thursday afternoon, U.S. stocks showed mixed performance. The S&P 500 edged up 0.2% to a record high, while the Dow Jones Industrial Average gained 0.8%. However, the Nasdaq Composite slipped 0.2%, according to FactSet data. Meanwhile, President Trump’s advocacy for lower interest rates and reduced oil prices continues to influence investor sentiment.
