Wall Street is off to a rip-roaring rally to start President Donald Trump’s term. - MarketWatch photo illustration/iStockphoto
A rip-roaring rally at the onset of President Donald Trump’s second term in office has brought the S&P 500 back to record territory, stretching market valuations to extremes.
In turn, investors have wondered whether there are cheaper alternatives to megacap technology stocks that are still poised to benefit from the president’s early moves.
The forward price-to-earnings (P/E) ratio for the S&P 500 SPX climbed above 22 this week, approaching its highest level in nearly four years. The last time it surpassed this threshold was in November, when the earnings multiple rose to 22.34 — its highest level since December 2020, according to Dow Jones Market Data (see chart below).
The P/E ratio measures a company’s stock price relative to its earnings per share. A high P/E suggests that a stock has become expensive compared to its earnings — a crucial fundamental for a company — and is potentially overvalued.
JPMorgan Chase & Co. JPM Chief Executive Jamie Dimon on Wednesday expressed concerns over the elevated valuation of the U.S. stock market. The veteran banker opined that asset prices are “in the top 10% or 15%” of historical valuations and are “kind of inflated, by any measure,” he said in an interview with CNBC at the World Economic Forum in Davos, Switzerland.
That’s why it might be time for investors to snap up less frothy but quality opportunities in the market that could be winning trades under Trump 2.0, bolstered by a solid U.S. economy and ongoing optimism around artificial intelligence, market analysts told MarketWatch.
“Earnings expectations for the S&P 493, excluding the ‘Magnificent Seven,’ are for them to accelerate — not quite up to the level that will match or exceed that of Mag 7, but [which] could provide some ripe opportunities considering the fact that the other 493 stocks generally have been laggards rather than leaders,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott LLC.
“[Financial stocks] not as inexpensive as they were six months ago, but with the prospects for the economy remaining pretty solid, we might see better bank loan activities and more prospects for M&A activity and IPOs, which is a good setup for the financials sector,” he told MarketWatch via phone on Wednesday.
Financials has been viewed as a top “Trump trade” as the new president has long pushed for scaling back regulations in the financial industry, which would help drive loan growth and investment-banking revenues for some of the country’s largest banks. The S&P 500’s financials sector quietly churned out significant returns in 2024, making it one of the top-performing sectors last year.
The industrials sector XX:SP500.20 is also gaining momentum, as Wall Street expects double-digit earnings growth for the sector in 2025, said Katie Nixon, executive vice president and chief investment officer for the wealth-management business at Northern Trust.
Meanwhile, expectations that China will continue unveiling economic stimulus plans to revitalize its industrial activity may propel companies in this highly cyclical sector of the stock market, Luschini said.
In addition, the utilities sector XX:SP500.55 continues to look enticing in 2025 after President Trump’s announcement of the new $500 billion Stargate joint venture focused on power-hungry artificial-intelligence infrastructure, which is expected to drive a surge in electricity demand, market analysts said.
Here’s a look at the forward P/E ratios for the S&P 500’s 11 sectors as of Wednesday, according to FactSet data.
S&P 500 sector
Forward price-to-earnings ratio
Consumer Discretionary
30.23
Information Technology
29.41
Industrials
23.02
Consumer Staples
21.37
Communication Services
20.13
Materials
19.67
Utilities
17.74
Real Estate
17.68
Health Care
17.36
Financials
16.80
Energy
14.71
Source: FactSet data, as of Jan. 22.
Big Tech may still work in 2025 — but earnings growth must demonstrate strength
To be sure, high valuations for megacap technology stocks don’t necessarily make them less attractive, as some investors may still want to chase those investments in their quest for higher returns.
That’s because the so-called Magnificent Seven group of technology companies MAGS will remain “the main engine” driving earnings growth in 2025, analysts told MarketWatch.
“Megacap tech stocks may continue to work for investors in 2025, and they are expected to continue to deliver a very rapid pace of profit growth, albeit [one that’s] expected to slow on a year-over-year basis,” Luschini said. “But it will still be quicker than the S&P 500’s earnings collectively. That’s a reason for investors to remain long in those stocks.”
A 15% earnings-growth expectation for the S&P 500 in 2025 leaves headroom for stocks to advance this year, he added, but it must be underpinned by earnings growth coming to fruition, rather than expectations that the market’s multiple is going to continue to expand.
With valuations starting 2025 at extremely elevated levels, it is more likely that earnings growth will have to do the heavy lifting, Northern Trust’s Nixon told MarketWatch on Thursday.
However, Nixon and her team anticipate that the contribution from strong expected earnings growth this year may be offset somewhat by a contraction in today’s high market multiple. “This belief is reinforced by the headwind of much higher interest rates,” she said.
U.S. stocks were mostly higher on Thursday afternoon after Trump argued for lower interest rates in the U.S. and called on OPEC to drop oil prices. The S&P 500 was rising 0.2% to trade in record territory, and the Dow Jones Industrial Average DJIA was up 0.8%. The Nasdaq Composite COMP was sliding 0.2%, according to FactSet data.
