The result of the US presidential election has created shockwaves in the financial markets and beyond and I’m sure raised questions about your own portfolios.

That’s understandable and arguably this was among the more consequential elections of recent times. However, the occupant of the White House has historically made little difference to the long-term returns available from the financial markets so it’s important not to overreact.

In this article we examine some of the stocks and sectors which might be most impacted while also looking at what Trump 2.0 means for inflation, growth, trade, interest rates and the dollar.

WHY IT’S IMPORTANT TO RETAIN PERSPECTIVE

To quote Pictet Asset Management’s senior multi asset strategist Arun Sai: ‘Our analysis of past US elections shows that the impact on asset prices usually starts to fade after a couple of months. Over the long term, economic fundamentals rather than politics tend to determine market direction.’

With this in mind we have delved into how the US market stacks up on earnings and valuation to help understand the context for market returns during a Trump presidency and looked at the potential macro-economic impact.

The other thing to consider is a point we borrowed from British journalist John Authers in our preview of the election: that you should take Trump seriously but not literally on policy. Some of his pre-election rhetoric on items like trade, tax and tariffs may be watered down. Although likely Republican control of all the levers of government does provide him with considerable room for manoeuvre

Pictet’s Sai says: ‘In this scenario, Trump has the power to institute a more radical programme. The federal debt will go up sharply – double the increase we would have got under Kamala Harris, according to the Committee for a Responsible Federal Budget.

‘That’s on top of potentially harsh tariffs, including the threat of a 10% universal baseline. This in our view is a very negative outcome for US treasuries. And though Trump is a big supporter of US oil and gas production (and anti-renewables), his push for greater domestic energy supply is unlikely to cause prices to fall by much, offset by oil demand staying stronger for longer.

‘On balance, this is likely to drive inflation higher forcing corporate bond spreads to widen and the yield curve to steepen.

‘This result favours US equities and the dollar and is negative for non-US equity and bond markets, not least emerging market debt. Within equities, banks stand out as a clear winner benefiting both from higher yields and potential deregulation.’

WHAT ABOUT STOCKS, SECTORS (AND BITCOIN)?

One individual stock which really stands out is Tesla (TSLA:NASDAQ) now up more than 40% in the wake of Trump’s election, with Elon Musk’s closeness to the president-elect expected to result in favourable treatment for the company. Given Trump is an avowed supporter of cryptocurrencies it is no surprise to see Bitcoin at record highs above $80,000 and even close to touching $90,000.

Smaller US companies with a domestic focus – with protectionist policies and a favourable tax regime likely to provide a supportive environment – are another likely beneficiary. And the Russell 2000 US small- and mid-cap index has been a strong performer in the wake of the election result.

Sectors which may benefit from a Trump presidency include banks, for the reasons Sai pointed to above, as well as oil & gas (thanks to deregulation) and pharmaceuticals, as Mirabaud’s senior investment specialist John Plassard observes: ‘Reducing the cost of drugs and boosting domestic production of essential medicines is another initiative that Trump could undertake, which could be advantageous for US pharmaceutical companies, particularly biotechs.’

Consumer discretionary stocks may face the largest impact if Trump sticks to the plan on tariffs and is met by tit-for-tat action in response, while the renewables space could count the cost if Trump rolls back Biden’s green infrastructure plans. 

How will Trump’s economic policies likely affect the macroeconomic landscape in the US and the rest of the world? Investors got a good steer on the direction of travel from the market moves on the day after the election.

Stocks went up by a lot more than they usually do after a US election, reflecting expectations Trump will introduce business friendly policies, cut taxes loosen financial regulations, and remove red tape for businesses.

Given Trump’s domestic focus, based on his ‘Make America Great Again’ slogan, it is no surprise the small-cap Russell 2000 index raced ahead by almost 6%, trouncing 2%-plus gains in the large cap S&P 500 and Nasdaq indices.

On the other hand, bond investors received a delayed Halloween scare as yields on 10-year treasuries soared by close to twenty basis points to 4.4%, inflicting price losses, reflecting fears of a higher national debt and stickier inflation.

Bond markets immediately priced in fewer interest rate cuts and a higher terminal rate, (the neutral policy rate) which has moved up to 3.8% from close to 3% a month ago, according to TwentyFour Asset Management.

WHERE DO US MARKET EARNINGS AND VALUATIONS SIT NOW?

The markets have so far assumed – rightly or wrongly – that Trump’s bark is worse than his bite and that talk of blanket tariffs and a trade war are his way of negotiating a deal.

However, the US economy is very different to the one he inherited in 2017 – it is running hotter, with lower employment (at or around 4% for 30 months in a row) and higher core inflation (and voters really don’t like inflation) together with higher deficits.

As Peel Hunt’s economists flag, whereas Trump’s policy mix boosted US growth during his first term, ‘the risk this time around is that a combination of demand-boosting tax cuts but supply-impairing import tariffs and immigration controls could harm long run US growth potential and stoke inflation pressures’.

The returning president also faces a different stock market to 2017 – valuations are considerably higher and earnings expectations for 2025 are stretched to put it mildly.

Using data from S&P Global, we can see consensus EPS (earnings per share) forecasts for the S&P 500 index are for 18% growth next year compared with 10% this year and the 6% trend growth rate of the last three decades.

Admittedly, the path of earnings has been volatile due to the pandemic, but growth had moderated to around 11% last year and the same is pencilled in for this year, so where is the sharp increase in 2025 supposed to come from?

Surprisingly, perhaps, the strongest growth in operating earnings is seen in Health Care stocks where profits are expected to jump by a third and make up 13% of the index total for the first time.

Close behind is Information Technology, where earnings are expected to jump more than 30% and make up over a quarter of the index total for the first time.

Next up is Materials, where mining and processing firms are forecast to grow earnings by more than 25% although they still only make up a small percentage of the index total by weight.

Curiously, earnings for the Communications Services sector – essentially tech by another name as it includes Alphabet (GOOG:NASDAQ) and Meta Platforms (META:NASDAQ), as well as actual media companies such as News Corp (NWS:NASDAQ) and Netflix (NFLX: NASDAQ) – are only seen rising 13% and making up just under 11% of the index total.

Just as odd, Financial stocks – which make up 17% of S&P 500 earnings and are considered a bellwether of the economy – are only seen increasing their profits by 1.8% next year, so if analysts are correct, growth is likely to be very lopsided and highly dependent on a small group of businesses.

Even if we assume the forecasts are accurate, right now the S&P 500 is trading on 36 times cyclically-adjusted earnings, higher than at the peak of the internet bubble in 2000, so there is no room for policy errors on the part of the incoming administration. [IC]

SOFT LANDING BETS INCREASE

There appears to be a consensus among economists that under Trump the US economy is more likely to see a soft landing and less likely to suffer a hard landing.

Senior economist George Brown at Schroders believes Trump is well-positioned to implement his economic agenda because prediction markets are assigning odds of over 90% that the Republicans achieve a so-called Red-Sweep of both the House of Representatives and the Senate.

‘And so, later this month we intend to further raise our above-consensus 2.1% growth forecast for 2025. Our previous forecasts in August were conditioned on betting odds at the time, which had pointed to a divided government under Harris,’ explains Brown.

Brown believes inflation could prove to be stickier, reinforcing his conviction the Fed will not be able to deliver as many interest rates cuts as it has indicated.

‘Trump’s return to the White House likely means that the Fed needs to keep rates above 3.5%, which is our estimate of the neutral rate,’ adds Brown. The Schroders’ team also believe Trump’s policies indicate a stronger US dollar, although fiscal pressures could weigh on the greenback longer-term.

THE RETURN OF THE BOND VIGILANTES

Trump’s policies hint at ‘massive’ increases in unfunded fiscal deficits over the next decade according to analysts at Panmure Liberum.

Based on estimates from the US non-partisan Tax Foundation unfunded deficits could rise by $6 trillion, increasing the US debt-to-GDP ratio to more than 143%, putting the US in the same bracket as Italy.

That looks conservative against an estimate from The Committee for a Responsible Federal Budget which sees Trump’s campaign costs adding $15.6 trillion to the public debt by 2025.

While no one appears to be contemplating the idea of the US defaulting on its debts, Trump’s spending plans will have costs attached to them.  Specifically, investors may demand higher treasury yields to compensate for the risks.

Researchers from Stanford found that for every one percentage point increase in the debt-to-GDP-ratio, 10-year yields rise by 0.32%.

Panmure Liberum points out this will raise borrowing costs for both consumers and businesses, not to mention the government.

TRADE FRICTIONS

Trade tariffs are a key part of Trump’s agenda and depending on the extent of actual measures deployed versus negotiating rhetoric, the impacts could be far reaching.

In general, trade wars create uncertainty for businesses and act as a drag on growth while stirring inflationary pressures.

China is clearly in Trump’s line of fire and preparing its own stimulus measures to mitigate tariffs and boost its flagging economy. Emerging markets could see the worst effects from trade frictions given they are already struggling with a stronger dollar.

Closer to home, Goldman Sachs has slashed its forecasts for Eurozone GDP growth in 2025 to 0.8% from 1% and trimmed estimates for the following year, based on the impact from expected trade tariffs and a ramp-up in European defence spending.

The investment bank believes the inflationary effects from tariffs will be modest because of retaliatory actions from European firms which could dampen demand. This also raises the prospect for further interest rate cuts from the ECB, argues Goldman.

US firms are not immune from the effects of Trump’s trade policies argues Pictet Asset Management. It estimates companies could suffer a ‘hit’ to earnings of around 7% as tariffs on imports from China are increased, some of which would be offset by tax cuts. 

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