The upcoming swearing-in of President-elect Trump on Monday is set to attract significant global attention. This moment comes at a pivotal junction for investors, who will be keenly awaiting the onset of unconventional policies. Markets have had sufficient time to analyze Donald Trump’s suggested policy shifts, yet the divergence between expectations and the reality of policy implementations could play a crucial role in future developments.
The phenomenon known as the “Trump bump”—characterized by a continued rise in U.S. stock prices post-November’s pivotal election—has rapidly diminished. Investors who anticipated a seamless transition into Inauguration Day may already find themselves disillusioned. In conjunction with the new administration’s uncertainties, markets are reevaluating their forecasts concerning inflation and interest rates.
The latest employment statistics disclosed that the U.S. economy saw an increase of 256,000 jobs in December, raising fresh doubts about the extent to which U.S. inflation can decelerate. This data also significantly diminishes the likelihood of the Federal Reserve enacting rate cuts this month. Projections for 2025 have now become increasingly varied, with market indicators predicting at most one 0.25% cut for the entire year, down drastically from the four reductions anticipated last autumn.
Additional inflation concerns are tied to Trump’s policy preferences, including reduced immigration, tax reductions, and higher trade tariffs. Worries that the incoming administration may favor economic growth over controlling debt and inflation have resulted in yields on 10-year U.S. Treasuries climbing to approximately 4.8%—a level not observed since fall 2023. This unpredictable outlook suggests that the forthcoming corporate earnings season will be critical for stock recovery.
Thanks to advancements in AI and a resilient economy, forecasts for corporate earnings remain optimistic. Analysts project a growth rate of around 15% for company earnings this year, following just under 10% growth in 2024. This surge in earnings can be attributed to the delayed impacts of earlier interest rate cuts and a robust domestic market.
Nonetheless, apprehensions concerning potential trade wars with countries like China, Canada, Mexico, and the EU have cast a shadow over Trump’s electoral victory. Heightened trade tensions could jeopardize both economic growth and inflation, resulting in countries opting to export goods at lower prices. The Tax Foundation concluded last year that tariffs enacted by both Trump and Biden produced a net detrimental impact on U.S. economic performance and job creation.
Investors’ cautious approach to Trump
Future tariffs may affect U.S. consumer firms via increased input expenses and households through price hikes on products. Viewed through an optimistic lens, these punitive tariffs could lay the groundwork for negotiations, with the U.S. engaging from a strong position.
However, the apprehension surrounding the timing and magnitude of these tariffs could lead to heightened market volatility as the year unfolds. After two highly successful years for U.S. stocks, investors may be reluctant to take excessive risks in a third consecutive year. Last year, the market surpassed numerous end-of-year expectations by the end of the first quarter, continuing its upward trend and concluding 2024 with a rise of nearly 25%.
This year will be crucial, hinging on the new administration’s policy directions and whether the U.S. economy can maintain its strength amid persistently high interest rates. Currently, the U.S. stock market is trading at about 21 times expected earnings, slightly higher than the five-year average of 20 times. Within this context, there appears to be minimal evidence of irrational exuberance.
The quarterly performances of leading U.S. companies have been under close watch, often leading to short-term market fluctuations. The increasing significance of technology firms has led to some remarkable market dynamics. Organizations that were rewarded for their profit growth last year have amplified market concentration, with the top ten stocks now constituting approximately 37% of the S&P 500 Index.
In spite of inflation-related uncertainties, the U.S. anticipates another year marked by solid earnings growth backed by a sturdy economy. The potential for growth could be further bolstered by deregulation and tax cuts, although “Trump 2.0” has already compelled some investors to reassess their approaches. Smaller firms, oriented more towards domestic business, are beginning to outperform major tech companies after a prolonged period.
The technology sector presents a complicated scenario. AI has elicited enthusiastic responses from investors, becoming a dominant force in the U.S. market, with the so-called “Magnificent Seven” trading at levels indicative of continued success. However, not all early practitioners and adopters of AI are guaranteed to thrive, reminiscent of the dot-com era in the early 2000s.
Even though passive funds that track U.S. market indexes have flourished in 2024, active investment strategies may be more adept at distinguishing ultimate winners from losers, potentially representing a more favorable option. Given the United States’ stronghold within global markets, active global strategies could also gain an edge.
