After a Broad Rally Ahead of Trump's Inauguration, the S&P 500 is Now Up in 2025

This week, the U.S. stock market extended its rally, with all S&P 500 sectors posting gains. Investors welcomed a reversal in bond market interest rates, which had been climbing at an alarming pace. The improved sentiment pushed major indexes into positive territory for January, with the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite each booking weekly gains, according to data. Both the S&P 500 and Dow experienced their strongest weekly rallies since early November, coinciding with Donald Trump’s presidential election victory.

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A notable aspect of this rally is the broadening market participation. Louis Navellier, Chief Investment Officer at Navellier, highlighted in a Friday note that the equal-weighted S&P 500 index outperformed the traditional S&P 500, a benchmark heavily skewed toward Big Tech stocks. “What’s encouraging is that the even-weighted S&P is leading,” Navellier said, pointing to this as a positive indicator of the market’s expanding strength.

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This broad recovery comes after a challenging start to 2025, marked by a sharp increase in Treasury yields. As the bull market widens ahead of Donald Trump’s inauguration, declining interest rates have provided much-needed relief to stocks.

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The S&P 500’s top-performing sectors this week were financials, energy, and materials, each surging around 6%, according to FactSet data. Financial stocks, in particular, benefited from robust fourth-quarter earnings reports by major Wall Street banks. Citigroup, Goldman Sachs, and Morgan Stanley all posted weekly rallies of around 12%.

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Chris Davis, chairman of Davis Advisors, noted that despite this rally, banks remain undervalued compared to the broader S&P 500. Davis, who manages the Davis Select Financial ETF (which climbed 6% this week), suggested that investors anticipate potential benefits from deregulation under the incoming Trump administration. While Davis does not expect “radical” deregulation, reduced regulatory complexity could boost the sector’s profitability.

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Friday marked the final trading session of President Joe Biden’s term, with Donald Trump’s inauguration set for Monday. Major U.S. stock indexes closed higher, with the Dow gaining 0.8%, the S&P 500 rising 1%, and the Nasdaq Composite advancing 1.5%. These gains were supported by a significant retreat in Treasury yields.

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The yield on the 10-year Treasury note fell 16.1 basis points to 4.61%, its largest weekly decline since late November, according to Dow Jones Market Data. Yields dropped sharply on January 15 after December’s core U.S. inflation reading came in cooler than expected. Lower bond yields eased pressure on stocks, particularly those with higher price-to-earnings ratios.

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Despite the broader rally, the technology sector—the largest component of the S&P 500—remains slightly negative for the year. Tech stocks rose 1.6% this week but are still down 0.2% for January, FactSet data shows. The Invesco S&P 500 Equal Weight ETF outperformed with a 3.9% weekly gain, bringing its year-to-date increase to 2.7%.

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Big Tech stocks also climbed this week. The Roundhill Magnificent Seven ETF, which equally weights seven major tech players—Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta—recorded a weekly gain of nearly 2%, pushing its year-to-date rise to 1.9%.

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Small-cap stocks, measured by the Russell 2000 index, surged 4% this week, adding to the market’s broad-based recovery. The index is now up over 2% for the year, benefiting from falling bond yields. Navellier emphasized that declining rates alleviate pressure on smaller companies, which are often more leveraged than their larger counterparts.

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The retreat in Treasury yields played a crucial role in supporting this week’s market rally. The cooling inflation data and remarks from Federal Reserve officials about potential rate cuts in 2025 contributed to the decline. However, the market continues to adjust to the broader implications of shifting interest rates. Lower yields reduce borrowing costs and make equities more attractive relative to bonds, particularly for sectors with higher valuations.

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The U.S. stock market’s performance this week reflects a positive start to the year, but challenges remain. Falling bond yields have provided temporary relief, yet the market remains sensitive to changes in interest rates and economic data. Investors are also closely watching for policy shifts as Donald Trump takes office. Reports suggest Trump may issue up to 100 executive orders shortly after his inauguration, potentially impacting trade, regulation, and fiscal policies.

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As the holiday-shortened trading week approaches, market participants are expected to focus on policy developments and any signals of further economic shifts. For now, the broad-based rally suggests optimism, but the interplay between bond yields and stock valuations will likely remain a key theme in the weeks ahead.

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