If you turn on the TV, don’t worry, we haven’t gone back to 2016. Although Donald Trump is once again in the White House, the global context and market trends are different, so, according to investment firms, his impact will also have different nuances.
It’s true that, for now, as Banca March experts remind us, U.S. stock markets have celebrated Trump’s return to power with gains particularly concentrated in the financial sector (6%), industrials (4%), and discretionary consumer goods (3.6%), as well as companies with greater exposure to the domestic economy, such as small-cap companies (5.8%). However, they note that regionally, it didn’t sit well with European and Chinese markets.
“On the other hand, U.S. sovereign bonds are pricing in Trump’s plans: higher fiscal deficit and less contained inflation with the introduction of new tariffs and a reduced labor supply due to stricter immigration. As a result, the long end of the sovereign yield curve was most affected, with a price drop in the U.S. 10-year note, which led to a yield increase of +16 basis points, pushing interest rates to the highest level since July and causing curve steepening to the highest level in almost two years. In this case, the term premium between the 3-month bill and the 10-year bond is almost nil (-13 basis points). In Europe, bonds reacted cautiously, looking more at the economic burden of a more restrictive trade relationship with the world’s leading power,” add Banca March analysts.
The First Winners
As Marc Pinto, Head of Americas Equities, and Lucas Klein, Head of EMEA and Asia-Pacific Equities at Janus Henderson, recall, during the 2016 elections, the S&P 500 index gained nearly 5% from the day before the presidential election until the end of the year, in what became known as the “Trump rally.” They expect a similar trend this time.
Considering market reactions, Arun Sai, Multi-Asset Strategist at Pictet AM, explains that U.S. stocks, the dollar, and Bitcoin are recovering, while U.S. Treasury bonds have sold off in anticipation of lower taxes, deregulation, and higher inflation. “This is an extension of the previous days and weeks, as investors had largely positioned for a Republican presidency. The rallies in riskier assets imply some relief that the worst-case scenario of a contested election was avoided,” Sai says.
The expert warns that the impact of U.S. presidential elections on asset prices generally begins to fade after a couple of months, which will bring more clarity on who the true winners of a Trump 2.0 era are. “However, Sai explains that there are areas where Trump’s policies are likely to have a more lasting effect. “His plans to raise tariffs on imports from China and other countries could significantly, though not drastically, reduce U.S. earnings by around 7%, some of which may be offset by tax cuts. The impact may not be uniform across sectors, with discretionary consumer goods, basic consumer goods, and industrial sectors most affected. Tariffs and trade frictions do not bode well for emerging markets, although a non-recessionary cycle of monetary easing creates an attractive macroeconomic context for them,” he notes.
He also believes corporate debt spreads could widen. “The overall picture favors U.S. equities and the dollar, especially banks, which may benefit from higher debt yields and possible deregulation. But it is negative for non-U.S. equity and fixed-income markets, particularly emerging market debt,” Sai states.
The Potential Losers
According to Fidelity International, Trump’s return to the presidency will bring significant changes to U.S. economic policies, with the most immediate and important being his trade policy proposals, especially tariff use, where the president has considerable executive authority. While they don’t expect Trump to implement all his trade proposals right away, they do anticipate that he’ll use them to set policy direction and negotiate better deals, possibly with a more gradual approach.
“We believe China, Europe, and Mexico, which have the largest trade deficits with the U.S., are the most vulnerable regions. Trump’s policies also focus on imposing stricter controls on immigration, which could curb labor supply and reverse recent disinflationary trends. It will be essential to closely monitor his rhetoric and any subsequent action,” says Salman Ahmed, Global Head of Macro and Strategic Asset Allocation at Fidelity International.
Meanwhile, Niamh Brodie-Machura, Co-CIO of Equities at Fidelity International, notes that they’re closely watching two areas: “One is the part of the global market that could be affected by higher tariffs, so we’ll see what the Trump administration finally articulates. On the other hand, China has not yet launched a significant fiscal stimulus, so Beijing has room to take steps to counter the impact of a tariff hike on global trade and demand. This could have broad implications for a range of assets, from Chinese stocks to the dollar and U.S. Treasury bonds. The second is that, while reflation should benefit businesses, it only does so as long as it doesn’t overheat. We saw this in the post-COVID period, and there’s a risk we may find ourselves in that situation again.”
Lastly, the expert at Pictet AM adds: “Federal debt will increase sharply. If Trump implements a 10% universal tariff, this could be very negative for U.S. Treasury bonds. As for oil and gas, Trump is a strong supporter of U.S. production and is anti-renewables, but it’s unlikely that higher domestic energy supply will bring fuel prices down significantly, as oil demand will remain strong for longer. However, the effect may be inflationary.”
Geopolitical Implications
During Trump’s first term, one of the most repeated words was volatility, as he became the president who governed through tweets, especially in matters affecting the international arena. According to Thomas Mucha, Geopolitical Strategist at Wellington Management, Trump’s first administration is not a perfect analogy for assessing what kind of U.S. foreign policy to expect in the next four years, given that—unlike the first time—there’s now the biggest war in Europe in decades, the biggest conflict in the Middle East in decades, escalating military tensions in the Taiwan Strait and the South China Sea, and a rapidly fracturing global order with China/Russia/Iran/North Korea aligned against the U.S./NATO/Japan/South Korea/Australia, along with the increasingly negative implications of climate change for national security.
Mucha expects a more “transactional” and “robust” approach to U.S. foreign policy, meaning a greater reliance on bilateral negotiations, with less emphasis on long-term strategic implications (a significant departure from the more multilateral approach of the Biden administration), and an accelerated focus on defense/national security across the board.
“There will also be greater use of U.S. economic power as leverage on the geopolitical stage, meaning significantly higher tariffs on China but also on some allies in Europe and the Indo-Pacific, and a greater emphasis on U.S. energy production and export. Additionally, we expect a wider range of potential outcomes in Ukraine, including increased U.S. pressure on the Zelensky government to negotiate an end to the conflict, as well as a tougher U.S. stance toward Iran, with fewer restrictions on Israeli military policy in the region,” explains Mucha. Another important point for this Wellington Management expert is that Trump 2.0 could open the door to U.S.-China negotiations on several key geopolitical issues, including Taiwan.
Implications for Investors in Equities
According to Janus Henderson experts, we will see the first measure of the new government early next year, when lawmakers must reach an agreement to raise the debt ceiling (the total amount of debt the U.S. can accumulate, as determined by Congress) or risk the country defaulting on its obligations. Meanwhile, the Tax Cuts and Jobs Act of 2017—enacted under Trump, which reduced tax rates for individuals and businesses—will expire at the end of 2025.
“In this sense, we could see episodes of volatility if a Republican term translates into extreme measures. Trump, for example, has proposed not only extending the 2017 tax cuts but increasing them, which could further inflate an already substantial federal deficit. He has also promised to impose tariffs of up to 60% on imports, which could fuel inflation and push Treasury yields higher. And markets that could be impacted by trade policies, such as China, could weaken,” acknowledge Marc Pinto, Head of Americas Equities, and Lucas Klein, Head of EMEA and Asia-Pacific Equities at Janus Henderson.
Experts remain cautious and acknowledge that this reality will have nuances. “Policy does not always align with campaign rhetoric, and even among Republicans, there are divisions on key issues. Therefore, we encourage investors to focus on the major themes that have proven to be the primary drivers of markets recently. These include innovation in healthcare, productivity growth through artificial intelligence, and the rise of new manufacturing centers in emerging markets. Ultimately, these and other trends, which seem likely to persist in the coming years, could have a more lasting impact on stock performance than any election,” they conclude.