US Presidential election: Trump wins again – what could it mean for markets?

Equity markets hate uncertainty, and the immediate response has been broadly positive given a clear winner has emerged – US stock markets have climbed to new record highs, with financial stocks among the biggest gainers on hopes that Trump will ease regulations. UK and European markets initially soared on Wednesday morning before paring gains.

Whilst the initial reaction has been exuberant, given the possible prospect of weeks of protracted wrangling/legal challenges, this euphoria may prove short lived. Once initial gains have been banked, investors may well focus more on the longer-term implications of Trump’s policies.         

“History teaches us that whoever occupies the White House makes little difference to equity market performance. In the end, it is fundamentals that matter.”
 

Trump’s agenda will likely continue to expand the deficit well beyond the Congressional Budget Office’s (CBO) assumptions, which has the Tax Cuts and Jobs Act 2017 (TCJA) expiring at the end of 2025. There has been an immediate rise in US Treasury yields together with a strengthening of the US dollar. The immediate reaction from markets suggest they expect Trump to follow through on his key policy objectives: extend the TCJA, lower business taxes, less government regulation and a more combative US trade policy.

In terms of currencies, the US dollar has soared with currency markets immediately pricing in Trump’s proposal to increase trade tariffs. At the same time, the euro fell sharply, not only because higher growth in the US is likely to be inflationary, supporting the US dollar, but also due to Trump’s pledge to slap 10% tariffs on European exports. It remains to be seen whether Trump follows through on his threat to impose tariffs on China or whether this is classic Trump ‘deal-making’ with the real objective a US-China trade agreement.

Market implications

US equity markets have risen because investors see Trump as positive for corporate America. Similarly to the 2016 election, the US equity market has reacted positively to a Trump victory – regulatory relief, proposed business rate cuts and additional tariffs on imports are all good news for US corporate earnings. 

Markets will view a clean sweep for Republicans as positive as it makes these policies more likely to be implemented. The National Federation of Independent Business (NFIB) Small Business Optimism index moved up dramatically after the 2016 election – it will be interesting to see if that is repeated. While Trump will likely impose additional tariffs, they likely will be less than that expressed whilst on the campaign trail. They will however result in retaliatory tariffs from US affected trading partners.  

The Trump victory likely means a near term boost to the US economy with Republicans committed to rolling back regulations and lowering taxes to boost growth. However, there is not a strong desire to bring the deficit back in line. Spending at current levels, which is typically associated with recessions, shows no signs of abating. Further increases in spending to stimulate the economy would only exacerbate the situation leading to larger funding needs, higher interest expense outlays and a potential crowding out effect resulting in higher for longer long-term rates. Once the dust has settled, bond markets will start to become concerned about higher inflation and larger US budget deficits. 

However, the ‘Trump Trade’ has largely already been priced in by bond markets. Rates had moved higher ahead of the election with expectations a Trump administration would mean higher inflation. Consequently, all else being equal, any further downside from here seems limited. It should also be noted that we have been here before. During Trump 1.0, inflation was around target (averaging 1.9%), growth stable and interest rates bound between 2-3%. Trump’s policies proved to be less severe than anticipated.    

Investor positioning

While this time may be different, history teaches us that whoever occupies the White House makes little difference to equity market performance. In the end, it is fundamentals that matter. However, specific policies also matter and will have implications for different regions and sectors. 

Capturing the headlines is Trump’s policy to impose tariffs (60%+ on all Chinese imports, 10% on other countries). Mitigating this threat however is the fact that both Chinese and European companies are far better prepared this time around to last. The EU believe they were caught short during the first Trump presidency and have already drawn up retaliatory tariff measures if needed. Sectors, such as renewables, will be exposed, but not all companies have a large US exposure and valuations seem already to have priced-in a Trump victory.

With regards to China, there may be a short-term market fillip post Trump’s victory. The Chinese National People’s Congress meets this week. A new stimulus package was always likely to be announced, but with Trump in the White House threatening tariffs, the size of this stimulus package may end up larger than planned.

Until we see what the new Trump administration does, rather than what it says it will do, increased financial markets volatility should be expected. We believe investors need to be discriminating – US equities overall will likely take Trump’s victory as a positive, offset by non-US equities where we may see areas of weakness due to tariff concerns. However, where there is market volatility, there is also opportunity for an active manager, creating a fertile trading environment.        

What are the next steps?

House of Representatives – At the time of writing the final result is unclear, with Republicans holding 206 seats and Democrats on 191. The winning party needs 218 seats for House majority

Electoral College – State Electors vote in Electoral College on Tuesday 17 December 2024

Certification of result – US Congress meets on Monday 6 January 2025 to formally certify result 

Start of presidency – Trump sworn in as president on Monday 20 January 2025

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.