The mood on Wall Street has been decidedly buoyant heading into and following President Donald Trump ‘s inauguration, but that could open the market up to some disappointment. The S & P 500 is coming off its best week since November, after what was a rocky start to the year, as Trump’s return to the White House lifted those parts of the market poised to benefit most from his pro-growth policies. Risk assets such as bitcoin popped, as did oil stocks and small caps. In fact, the major averages appear set to close out the month with gains, with some especially encouraging trading activity beneath the surface as the rally starts to broaden out beyond the megacaps. The equal-weighted S & P 500 and small-cap Russell 2000 are up more than 3% for the year, outperforming the market cap-weighted S & P 500′ s rise of more than 2%. But that doesn’t mean stocks are in the clear yet, given stretched valuations and rising bond yields that could lead to a near-term drawdown. .SPX YTD mountain S & P 500 “US equity outperformance has also reached near extremes. The optimism on US high momentum stocks is high — recently US momentum outperformed the Magnificent 7, which also underperformed the S & P 500. With more bullish expectations there is risk of disappointment and some reversal for some of those,” Christian Mueller-Glissmann, Goldman Sachs’ head of asset allocation research, wrote on Tuesday. “The probability of S & P 500 drawdown has picked up due to higher valuations, less negative inflation momentum and increased (geo)political uncertainty,” Mueller-Glissmann added. “A continued reflationary shift for the US with rising bond yields might further weigh on cyclical assets, like Russell 2000 and non-US equities.” Mueller-Glissmann said he is “modestly pro-risk” in 2025, seeking “selective opportunities” to diversify in the near term after a strong start to the year. Still, if markets shake off their excess in the first quarter, analysts expect that the path forward for the remainder of the year is to the upside. After all, with earnings growth expected to be more than 12% in 2025, according to Canaccord Genuity, the rally still has legs. “We still expect to see some additional near-term downside for the SPX,” Michael Welch, analyst at Canaccord Genuity, wrote on Tuesday. “And we believe a Q1 low will set the stage for another positive year.” Welch noted that the median drawdown in the first quarter following a gain of more than 20% in the previous year is 4.4%. This, he said, is typically followed by a median calendar year advance of 12.09%.
