As President-elect Donald Trump prepares to begin his second term in office, investors are debating how his proposed policies will play out in the stock market. While the answer may be unclear, what’s evident is the remarkable position the market is in as he takes the helm of the country.

For one, 2024 marked the second consecutive year the S&P 500 (^GSPC) rose more than 20%, a feat not seen since 1997-1998.

There were a few reasons for the massive gains: The Federal Reserve cut interest rates for the first time in roughly four years in 2024 and followed with two more reductions, effectively lowering the cost of borrowing, which is good for both businesses and consumers.

Corporate earnings growth accelerated during the year. Despite a brief growth scare that spooked investors in late summer, the US economy ended 2024 on solid footing. And enthusiasm over the prospects of generative artificial intelligence caught fire among investors, giving a boost to AI darling Nvidia (NVDA) and its “Magnificent Seven” peers.

Zooming in on the rally, much of last year’s gain was driven by just a handful of players. In fact, the S&P 500 has never been this concentrated, with the top 10 stocks in the index making up nearly 40% of the index. Many of those stocks, which include the “Magnificent Seven,” have driven the lion’s share of gains over the past two years.

While many have called the S&P 500’s concentration a key risk to the bull market, it’s also been a major reason why US stocks have soared. Large-cap tech earnings have widely outperformed results from the other 493 companies in the S&P 500, supporting the investor bias toward America’s largest tech names.

Meanwhile, the S&P 500’s current high valuation, which sits at a 21.5 forward 12-month price-to-earnings ratio, per FactSet, is well above the five-year average of 19.7 and the 10-year average of 18.2. At 21.5, the S&P 500’s valuation has only been higher than this level during the 2021 post-pandemic boom and the dot-com bubble.

Several Wall Street strategists have pointed out that the index’s increasing slant to large technology companies supports the elevated valuation levels.

“Today’s market, 50% of it is asset-light growth companies, tech, healthcare, higher-margin industries,” Bank of America Securities head of US equity and quantitive strategy Savita Subramanian told Yahoo Finance in December. “Whereas back in the 80s, 70% of it was manufacturing. So I think the exercise of comparing today’s multiple to historical averages is fraught with problems.”

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All in all, it appears to be a banner moment for stocks. But it’s unclear whether the market optimism will continue, especially as investors question how much further the Fed will cut rates in 2025 — or if the central bank will reduce borrowing costs at all.

When considering that US equity valuations are already rich, UBS asset management’s Evan Brown told Yahoo Finance at its 2025 outlook roundtable it “doesn’t take much” to change the widely held beliefs that the US economy and equities will outperform the rest of the world in 2025.

A key variable in where markets are headed, of course, is Trump himself. While stocks surged to new highs after his election in November, economists have said more recently that some of the policies he has proposed, such as higher tariffs and mass deportations, could keep inflation elevated.

The details of those policies remain unknown. However, once they are actually enacted, they’ll come against a stock market backdrop that many have marveled at — and one that could be ripe for change.

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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