The US stock market seems to be back on track, but will the nightmare from three years ago repeat itself?

In the days leading up to President Trump's inauguration, the U.S. stock market seems to have regained some vitality.

According to The Wall Street Journal, the S&P 500 Index and the Dow Jones Industrial Average recorded their best weekly performance since last November. This rally was primarily driven by improved inflation data. The benchmark 10-year Treasury yield fell to 4.61%.

Although the market performance at the beginning of 2025 is encouraging, some analysts and investors remain concerned about future trends. As Trump returns to the White House on Monday, there are worries that his tariffs and immigration policies will drive inflation higher in the future. Callie Cox, Chief Market Strategist at Ritholtz Wealth Management, pointed out:

"The threat of higher inflation still looms in our minds, easily reminding us of the scenarios that played out again in 2022. The trauma of that inflation is still fresh."

Policy Uncertainty Intensifies Market Volatility

In 2022, the aggressive interest rate hikes by the Federal Reserve to combat inflation led to a collective decline in the stock and bond markets. It wasn't until the following year that the AI boom propelled the stock market into a bull market.

Now, investors are still worried that Trump's policies and other government measures may trigger another rise in bond yields, which would further pressure the stock market. Over the past month, yields have surged, limiting stock returns. Since the Federal Reserve's cautious hints about future rate cuts in mid-December, the stock market has shown a clear downturn.

Currently, investors are optimistic about future corporate earnings growth, with earnings reports from companies like Netflix, Procter & Gamble, and American Express becoming focal points. A recent survey by the American Association of Individual Investors shows that individual investor optimism has significantly cooled, with expectations for stock price increases over the next six months dropping to the lowest point since November 2023.

Kevin Gordon, Senior Investment Strategist at Charles Schwab, noted:

"Index volatility is expected to increase due to policy impacts, which will be markedly different from what we see in 2024."

U.S. Stock Market Faces Multiple Challenges

In recent weeks, the stock prices of tech giants have continued to decline, weakening the foundation of the strong market rebound seen over the past two years.

From Alphabet to Amazon and Microsoft, the overall market capitalization of the "Big Seven" has evaporated by about $620 billion over the past month. With current stock prices appearing expensive compared to historical levels, the S&P 500 Index's price-to-earnings ratio has reached 22 times, significantly higher than the 10-year average of 18.5 times.

Investors are also concerned that rising benchmark yields may put more pressure on cash-strapped Americans, potentially affecting the resilience of the economy.

Despite numerous concerns, recent data shows that the fundamentals of the U.S. economy remain robust. The December employment report indicated that hiring activity far exceeded expectations, suggesting a strong labor market. In terms of corporate earnings, JPMorgan's net profit grew by 50% in the fourth quarter, while Goldman Sachs' profits doubled At the beginning of the New Year 2025, multiple companies announced transactions in succession, JCPenney merged with Sparc Group, the merger deal between Getty Images Holdings and Shutterstock is valued at $3.7 billion, and Constellation Energy agreed to acquire Calpine for $16.4 billion. The activity of these transactions indicates that corporate investment sentiment remains optimistic.

Market trends will be heavily influenced by Trump’s policies and other government decisions. According to Mark Hackett, Chief Market Strategist at Nationwide:

“We no longer need the Federal Reserve to take aggressive rate cuts; it feels like a 'Goldilocks' scenario.”

Risk Warning and Disclaimer

The market has risks, and investments should be made cautiously. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at your own risk