The S&P 500 has hit a new all-time high, marking a strong recovery after the market downturn in late 2024. Despite finishing last year with an impressive 23% gain, the benchmark index dropped 2.5% in December as concerns grew over the Federal Reserve's limited capacity to cut interest rates further.

Initially, the sluggish performance of the S&P 500 carried into the start of 2025, but recent data signaling modest inflation easing has boosted investor confidence, contributing to the market's recovery. Corporate earnings have also shown promising early results, boosting market sentiment.

A resilient economy is another tailwind. Economic data points have come in at moderately upbeat lately. Market participants are also enthusiastic over the new administration’s focus on deregulation.

As a result, the key U.S. equity gauge is now up about 3.7% this year (as of Jan. 22, 2025).

Optimism Around Trump’s Pro-Business Agenda

Investor sentiment has been further bolstered by optimism surrounding President Trump’s economic agenda. Trump has been taking swift actions immediately after his inauguration. Expectations of regulatory rollbacks and corporate tax cuts are driving hopes for increased corporate profits, adding momentum to the rally (read: Trump 2.0 Era Puts Focus on These ETF Areas).

Key Steps Taken by Trump

Policy Rollbacks: Trump revoked 78 executive orders issued by his predecessor, including significant climate and energy initiatives, signaling a shift away from pro-EV and clean energy policies.

Regulatory Review: He directed his administration to review subsidies and regulations that he deemed “unfair” or “market distortions,” particularly those favoring electric vehicles (EVs). Donald Trump issued more than 50 executive orders, including ones that reinstated Trump-era programs.

Tax and Business Agenda: Trump is expected to focus on reducing corporate taxes and dismantling regulations, which has fueled optimism among investors and businesses.

AI Initiatives: President Trump announced a joint venture dubbed “Stargate” on January 21, with OpenAI, Oracle and Softbank to invest ″$500 billion, at least” in the artificial intelligence (AI) infrastructure within the United States.

Delayed Action on Tariffs: Unlike in the past, President Trump has not yet focused heavily on imposing new tariffs, creating a more predictable trade environment for businesses.

Q4 Earnings Show Promise

The Q4 2024 earnings season is off to a strong start, with major banks surpassing estimates and offering encouraging guidance for the upcoming quarters. S&P 500 earnings for 2025 are projected to grow by 13.6% on a 5.3% increase in revenues. All 16 Zacks sectors are anticipated to see positive earnings growth, with 10 sectors expected to achieve double-digit growth rates, per Earnings Trends issued on Jan. 15, 2025.

Is Valuation of the S&P 500 Ripe?

In early November, Bank of America commented that the S&P 500 is statistically expensive by almost every measure. The estimated price/earnings (P/E) ratio for the S&P 500 Index is 27.92X (as of Jan. 22, 2025). The S&P 500’s last 5 years’ P/E average is 21.16X, 10 years’ P/E average is 18.48X, while the 20-year average is 15.86X. For this reason, the current P/E can be considered expensive.

S&P 500’s price/book (P/B) ratio was 5.22X as of Jan. 22, 2025, way higher than the minimum of 1.78X recorded in March 2009 and even higher than the maximum of 5.06X recorded in March 2000. Current price/sales (P/S) ratio for the S&P 500 is 3.12X, again way above the minimum of 0.80X recorded in March 2009. The figure is also above the maximum of 3.04X recorded in December 2021.

However, the S&P 500 has considerable exposure to the Mag-7 group, which boasts rich valuation due to its focus on the booming artificial intelligence space. We do not expect this exposure to hurt the S&P 500 ETFs.

S&P 500 ETFs in Focus

Against this backdrop, investors may track S&P 500-based exchange-traded funds (ETFs) like Vanguard S&P 500 ETF (VOO Quick QuoteVOO - Free Report) , iShares Core S&P 500 ETF (IVV) and SPDR S&P 500 ETF Trust (SPY Quick QuoteSPY - Free Report) . Investors can also play the growth part of the index with SPDR Portfolio S&P 500 Growth ETF (SPYG Quick QuoteSPYG - Free Report) and the value part of the index with SPDR Portfolio S&P 500 Value ETF (SPYV Quick QuoteSPYV - Free Report) .

SPDR Portfolio S&P 500 High Dividend ETF Fund (SPYD Quick QuoteSPYD - Free Report) is a good bet for the dividend plays of the index. Investors can also bet on the leveraged S&P 500 ETFs like Direxion Daily S&P 500 Bull 3X Shares (SPXL Quick QuoteSPXL - Free Report) and ProShares Ultra S&P500 (SSO Quick QuoteSSO - Free Report) , if the index manages to record some gains in 2025. If the S&P 500 falls, inverse ETF ProShares Short S&P500 ETF (SH Quick QuoteSH - Free Report) will rise.