If Wall Street has learned anything during Donald Trump’s first term as president, it’s that the stock market is a way for him to keep score. At various times he took the credit for stock market rallies, urged Americans to buy the dipand even considered dismissing Federal Reserve Chairman Jerome Powell blamed the selloff.
He is now preparing for a new term in the White House, and the market is once again at the center of his concerns. The problem is that it also brings a series of economic policy proposals which, according to many strategists, increase the risk of rising inflation and slowing growth.
So for investors who have benefited from the S&P 500’s more than 50% rise since the start of 2023, the best hope for keeping the market rolling through 2025 and beyond might be the fear of Trump from doing anything that would harm a rally.
“Trump views stock performance as an important part of his scorecard,” said Eric Sterner, chief investment officer at Apollon Wealth Management. “He routinely began his speeches as president during his first term with the question: “How’s your 401K?” when the markets were rising. So he clearly does not want to develop policies that would threaten the current bull market.”
The S&P 500 index took off after Trump’s victory on November 5, increasing its best post-election session Never. In the week to November 13, $56 billion was invested in U.S. equity funds, the highest amount since March, according to strategists at Bank of America Corp. using data from EPFR Global. And the S&P 500, with a strong technological component Nasdaq 100 Index and Dow Jones industry averages have all hit multiple record highs since Election Day, despite last week’s pullback.
What makes this reaction notable is that Trump’s campaign promises were not what one would normally consider investor-friendly. They include: high tariffs that risk straining relations with key trading partners like China; mass expulsions of low-wage undocumented workers; tax cuts targeted at corporations and wealthy Americans, which are expected to increase the national debt and widen the budget deficit; and a general protectionist approach aimed at bringing manufacturing back to America, where costs are higher than abroad.
None of these risks are a secret: they have all been widely discussed in investment circles. So where does this enthusiasm come from? Simple. Wall Street does not believe Trump will tolerate a decline in the stock market, even if it is caused by one of his own proposals.
President Pivot
“If some of these policies start to impact his popularity, start to impact the stock market in a way that he perceives as negative, I think he will change course,” said Emily Leveille, portfolio manager at Thornburg Investment Management, in a press release. interview.
Or, like Barclays strategists said in a note to clients Thursday: “We believe the president-elect should be taken seriously, but not literally. »
The possibility of tariffs is what investors are watching most closely, since Trump regularly used them during his first term as negotiating tools, threatening to impose them, and then just as quickly. course reversal when markets sold off in response. Along the way, he scuttled the stock as trade negotiations with China and Mexico dragged on and often plays on social networks.
This time, Trump proposed tariffs of 10 to 20 percent on imports from all countries. Even at the low end, that could lead to a 10% decline in U.S. stocks and a mid-single-digit decline in S&P 500 earnings, according to a team of UBS strategists. The universal tariff combined with a proposed levy of 60% or more on goods from China would reduce profits of S&P 500 companies by 3.2% in 2025, according to Barclays strategists.
“Threatening tariffs to gain an advantage in trade negotiations is one thing, but imposing them is another,” said Mark Malek, chief investment officer at Siebert, adding that Trump’s sensitivity to stock markets should, in theory, temper your approach.
Wall Street executives like Jamie Dimon seem to agree with the JPMorgan Chase & Co. said Thursday at the APEC CEO Summit in Peru that he believes the president-elect would want avoid triggering a stock market liquidation with its prices.
However, investors are taking the risk by selling shares of companies that are expected to suffer from the levies. The Nasdaq Golden Dragon China Index, which holds companies listed in the United States but with operations in China, is down 8.9% since Election Day. Coca-Cola Co. and PepsiCo Inc. lost about 5.5% each during the same period. And Hasbro Inc. fell 7.1%.
More 2016
Of course, historical analogies may not matter because conditions when Trump first took office in 2017 were so different from what they are today. At the time, the S&P 500 was coming off a 9.5% gain in 2016 and a slight decline in 2015. This time, the index is on a two-year tear, jumping 53% since the end of 2022 . In 2024 alone, he has achieved more than 50 records.
Interest rates were also much lower in 2017, with the federal funds rate between 0.5% and 0.75%, compared to a range of 4.5% to 4.75% today. And Trump may not get much help from the Fed after Powell said On Thursday, there was no need to rush with further rate cuts after the cuts at the September and October meetings.
High stock valuations and tight financial conditions could limit Trump’s ability to stimulate the economy and the stock market as he did in his first term, when he adopted a A $1.3 trillion spending billwhich increased spending on national programs as well as a A $1.5 trillion tax cut.
“President Trump will not be able to replicate the fiscal stimulus of his previous term,” Marko Papic, chief geopolitical strategist at BCA Research, wrote in a note to clients last week. “Trump 2.0 will curb immigration and be forced to rein in fiscal policy, the two pillars of American outperformance compared to the rest of the world. »
The risks are mainly manifested in the bond market, at least for now, as traders bet on a sell-off in Treasury bonds following Trump’s victory. According to Ed Yardeni, president and chief investment strategist at Yardeni Research, the degree of market tolerance is a key question.
“If bond yields rise significantly here because of fears of inflation and larger deficits, obviously the stock market is wrong,” he said.
And the final risk, counter-intuitive, is that Trump is too sensitive to what the markets are doing. Interference can also be destabilizing, which is generally not beneficial for stock prices, according to Siebert’s Malek.
“Markets, as we all know, can be fickle,” he said. “If Trump is too reactive to daily market movements as he was during periods of his first term, he and many others could find themselves victims of bullwhip. »