The Stock Rally is Back on Track. The Memories of 2022 Linger

In the days leading up to Donald Trump’s presidential inauguration, the stock market showed signs of recovery. However, some investors remain concerned that the challenges of 2022 may resurface this year, casting a shadow over the markets.

‍

The S&P 500 and the Dow Jones Industrial Average recorded their strongest performance since early November after the release of Wednesday’s consumer inflation report, which indicated a slowdown in price pressures. Many investors, initially braced for a disappointing report, were encouraged to rekindle the faltering stock rally. At the same time, the yield on the 10-year Treasury note fell back, closing the week at 4.61%.

‍

While the rally pushed stocks into positive territory for 2025, analysts and investors worry the gains may be short-lived. With Trump returning to the presidency, concerns over his proposed policies—such as steep tariffs and mass deportations—have raised fears of renewed inflationary pressures.

‍

“The threat of higher inflation is so deeply ingrained in our minds that it’s easy to imagine a repeat of 2022,” said Callie Cox, chief market strategist at Ritholtz Wealth Management. “The wounds of inflation are still fresh.”

‍

In 2022, stocks and bonds suffered significant losses as the Federal Reserve aggressively raised interest rates to combat runaway inflation. This left traders with limited options for sheltering their investments until a surge of interest in artificial intelligence spurred a bull market the following year. Now, investors are wary that Trump’s proposed policies, along with other government actions, could drive bond yields higher, putting stocks under renewed pressure.

‍

Bond yields have already been a headwind for stocks in recent months. Stocks began to decline in mid-December when the Fed signaled a more cautious approach to reducing interest rates. Rising yields tend to diminish stock returns and amplify market volatility, which has many market participants on edge.

‍

Another source of concern is the potential impact of expanded government deficits if Trump implements significant tax cuts. Larger deficits would likely necessitate increased debt issuance by the Treasury Department, which could reduce the value of existing bonds. Since bond prices rise when yields fall, an oversupply of debt could create additional challenges for the market.

‍

Investors are also monitoring a busy week of corporate earnings reports from major players such as Netflix, Procter & Gamble, and American Express. These results will help gauge whether companies’ performance can sustain the recent stock rally.

‍

However, enthusiasm among individual investors has waned recently. According to the latest survey by the American Association of Individual Investors, bullish sentiment—defined as the expectation that stocks will rise over the next six months—has fallen to its lowest level since November 2023.

‍

“We anticipate significantly more index-level volatility driven by policy developments out of Washington,” said Kevin Gordon, senior investment strategist at Charles Schwab. “That will be a key differentiator for 2025 compared to 2024.”

‍

There are other warning signs as well. Shares of major tech companies, which have been central to the market’s strong performance over the past two years, have seen notable declines in recent weeks. The so-called “Magnificent Seven”—Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla—have collectively lost around $620 billion in market value over the past month, weakening a crucial pillar of the market rally.

‍

Rising yields could further challenge the market, particularly as stocks appear overvalued by historical standards. The S&P 500 is currently trading at 22 times its expected earnings over the next 12 months, significantly above its 10-year average of 18.5 times. Higher borrowing costs tied to rising benchmark yields could also strain cash-strapped consumers, adding pressure to the economy’s resilience.

‍

As investors brace for a potentially volatile year, they are closely watching developments in Washington and the broader economic landscape. With policy decisions and market fundamentals in flux, the path forward for stocks and bonds remains uncertain.

‍