As the dust settles on the US election result, stock markets have generally signalled their approval of the clear-cut victory for Donald Trump and the Republican party. Unsurprisingly given his ‘America First’ agenda, US equities have delivered the biggest gains with the S&P 500 index rising 3% since Trump declared victory – hitting a new all-time high that will no doubt please the election winner.
Investors are betting that the 47th president will make good on his promises to slash corporate taxes, red tape and raise tariffs to boost economic growth and make America great again. The biggest domestic winners of the ‘Trump Trade’ so far have been banks (+7%), small-caps (+5%), technology stocks (+6%) and industrials (+4%), while energy companies (+3%) have also been boosted by expected growth in fossil fuel production[1].
It was not all good news for the president-elect, however, with bond yields, interest rate expectations and the US dollar all rising as investors expect his policies to reignite inflation. The prospect of higher interest rates for longer has also weighed on US real estate stocks (-4%) which were a notable post-election day loser alongside renewable energy companies (-6%) which dropped on fears that Trump will scrap green subsidies and tax breaks promised under the Democrat’s Inflation Reduction Act[2].
Reaction to Trump’s victory and his protectionist agenda has been unsurprisingly less enthusiastic outside of the US with emerging market and European equities broadly flat as investors digest the election result and ponder what comes next.
Into the unknown
Despite four years’ experience of his first administration and the predictable market reaction to winning his second, the longer-term impact of Trump 2.0 is far from clear.
The main thing we can be sure of is his unpredictability. Trump previously made many bold policy announcements that were then either abandoned or significantly watered down when enacted. His big promise this time round to impose tariffs of 20% on all imports and 60% on goods from China may face similar dilution if – as most people expect – the effect is inflationary. Trump’s other populist plan to curb immigration and deport thousands of workers may be curtailed for the same reason.
Evidence from the Federal Reserve meeting on Thursday also suggests that Trump is unlikely to have things all his own way, even if he wins a ‘clean sweep’ of the White House, Senate and Congress. Chairman Jerome Powell said that he would not resign if Trump asked him to and that the president-elect did not have the power to force him out. Of course, this is unlikely to stop Trump from publicly complaining about Fed policy – he has promised to appoint a shadow body to put downward pressure on interest rates – but his bite may prove to be less powerful than his bark.
Another certainty about Trump is that he will try to push the US stock market as high as possible. During his first term, he often used the S&P index to measure his own success but with starting valuations higher this time round, he has less margin for policy error.
This also means that he will require significant earnings growth to deliver meaningful share price gains from here. Pre-election consensus forecasts were for US companies to grow EPS by around 9% this year and 15% next but Goldman Sachs estimates that cutting corporate tax from 21% to 15% could add an extra 4%, which should – in theory – support healthy stock market returns and investor sentiment in the short-term.
Keeping calm
Historically election results – even surprise ones – have had limited long-term impact on stock markets and I expect the same this time round. Businesses across all industries and countries are adaptable and are often quick to take advantage of changing regulatory and trading conditions, as we saw during COVID. This is especially true of companies with strong balance sheets and management teams, and a clear benefit of understanding business fundamentals and picking stocks rather than indices.
Another potential positive is that value stocks tend to outperform when economies grow given conditions are usually supportive for areas like financials, energy, industrials and materials. This is especially true when starting prices are low and US value stocks are currently 40% cheaper than growth ones – which is historically extreme – while small-caps currently trade at a similar discount to large caps and should also benefit from an economy-driven value recovery.
Perhaps the final Trump certainty is that things will be eventful and markets often volatile – his first term was marked by regular comments on geopolitics to crypto currencies and everything in between. It will never be more important to separate noise from fundamentals and at SKAGEN we will remain calm, focus on the long-term and be ready to take any opportunities that come our way.
All figures as at 31/10/2024 unless stated.
[1] In USD as at 08/11/24. Dow Jones U.S. Banks Index, Russell 2000 index, Dow Jones U.S Industrials, Index, NASDAQ 100 Technology Sector Index, S&P 500 Energy Index.
[2] In USD as at 07/11/24. S&P 500 Real Estate Index, S&P Global Clean Energy Index.