US stocks rise as Trump's projected return prompts optimism and questions about economic impact
After the US election results projected Donald Trump’s return to the White House, US stocks soared to an all-time high, with the S&P 500 Index gaining nearly two percent.
According to BNN Bloomberg, investor optimism largely centres on Trump’s pro-business stance, sparking interest in equities and small-cap stocks, which are expected to benefit from anticipated deregulation and tax cuts.
However, experts are cautioning that the market may be focused more on the positive aspects of Trump’s presidency than on potential risks.
BNN Bloomberg reported that on the morning following the election, US stocks hit record levels, with the S&P 500 closing in on its 48th record high of the year.
Drew Pettit, a US equity strategist at Citi Research, told BNN Bloomberg that the market response was largely “expected,” due in part to the election’s relatively uncontested nature.
He noted that “a lot of the Trump trades are leading today,” as indices such as the Russell 2000 and S&P 600 saw gains of 4.5 to five percent on hopes that Trump's policies would benefit domestic US companies.
While Pettit acknowledged that the current market response was “logical,” he cautioned that it may be pricing in “more on the good side than it is on the negative.”
His outlook reflects broader sentiments among analysts that Trump’s policies, while business-friendly, may also introduce some economic volatility.
Trump’s projected presidency has raised expectations for policy changes, particularly around tax cuts and deregulation.
According to T. Rowe Price’s November 2024 report, Trump’s administration is likely to focus on extending tax cuts established during his first term, a move estimated to result in US$4tn to US$5tn in additional deficit spending over the next decade.
In addition, the report suggests Trump may push for lower corporate tax rates, although political realities could limit the scope of these cuts.
Trade policy is another area of emphasis, with the report noting that Trump has repeatedly hinted at tariffs, such as a potential 10 percent border tax on imports and a 60 percent tariff on goods from China.
While these moves aim to strengthen domestic industries, they could lead to retaliatory actions from other countries and increase costs for US consumers.
In terms of economic growth, the report highlights potential inflationary impacts from Trump’s policies. Increasing tariffs or enforcing tougher immigration policies may drive up production costs, possibly triggering a sustained rise in prices.
Blerina Uruçi, chief US economist at T. Rowe Price, warned that these policies could constrict the labour supply, tightening US labour markets and amplifying wage-driven inflation. Furthermore, a tough stance on immigration could reduce the supply of workers, adding further pressure on prices.
According to BNN Bloomberg, small-cap stocks have responded positively to the news of Trump’s return, with the Russell 2000 and S&P 600 indices showing some of the day’s highest gains.
T. Rowe Price also points to the potential for small-caps to benefit under Trump’s administration, particularly if deregulation and tax cuts encourage business growth.
Tim Murray, capital markets strategist at T. Rowe Price, noted that “US small-caps could benefit” if Trump reduces regulatory burdens on sectors like oil and gas, as well as on mergers and acquisitions.
Yet, industry impacts may vary widely. Energy companies, especially those in oil and gas, could benefit from reduced regulations, while renewable energy businesses may face pressure if parts of the Inflation Reduction Act (IRA) are repealed.
In the financial sector, there is potential for gains under Trump’s likely approach of reduced oversight, according to the report.
As the market adjusts to the anticipated policy environment, Pettit added a note of caution regarding interest rates. While immediate market responses have been positive, he highlighted that rising interest rates could limit the long-term fair value of equities, particularly for small-cap stocks.
He noted, “Longer run if rates stay higher, we think that really caps fair value on equity markets including small cap.”
In line with Pettit’s observations, T. Rowe Price emphasizes the need for caution around long-term economic implications. Higher inflation expectations could push bond yields upward, which may weigh on the valuation that equity investors are willing to pay for future cash flows.
Additionally, the report warns that ongoing trade tensions could introduce volatility into various industries, particularly those reliant on cross-border trade.
BNN Bloomberg notes that Trump’s trade and economic policies may also impact the US dollar, although T. Rowe Price refrains from making a firm directional prediction.
Trump has advocated for a weaker dollar, yet his tariff proposals could lead to appreciation if international demand for US assets strengthens. The report concludes that, despite Trump’s stated intentions, the dollar’s role as the world’s reserve currency is unlikely to change.
