Analysts expect volatility as Trump's trade policies challenge North American markets
Canadian and US analysts are evaluating the effects of Donald Trump’s recent election win on both sides of the border, predicting mixed results for Canadian and US equities.
According to BNN Bloomberg, Bay Street analysts and portfolio managers in Canada anticipate that Canadian stocks may ultimately benefit from Trump’s policies, despite a slower start relative to US markets.
Initial market responses saw Canadian stocks lagging, with the S&P/TSX Composite Index trailing behind the S&P 500. By noon Toronto time, the TSX was up 0.3 percent, while the S&P 500 posted a stronger 2.1 percent increase.
Analysts believe the setback for Canadian equities, particularly in commodities and resource stocks, will be temporary.
According to BNN Bloomberg, strategists foresee a swift recovery in sectors like metals and oil. Canadian financials, however, remain a focal point of optimism.
Philip Petursson, chief investment strategist at IGM Financial, explained, “You have to weigh valuation against policy, and that’s where Canada still has the edge. Financials in Canada are still attractive.”
Petursson noted that TSX-listed companies are trading at discounted valuations compared to their US counterparts, a factor that could benefit Canadian stocks in the long term, although valuations alone are not always predictive of short-term performance.
Brian Belski, chief investment strategist at BMO Capital Markets, echoed the importance of focusing on stock fundamentals rather than political shifts.
As Belski put it, “It’s a mistake to be a reactive investor in general. We are investment strategists, we’re not political strategists.” He further emphasized that Canadian stock trends often mirror those in the US, underlining the critical role the US economy plays in Canadian financial markets.
On the other side, a report by T. Rowe Price assesses the potential impact of Trump’s policies on the US economy. It suggests Trump’s administration could double down on several key areas, including tax cuts, deregulation, and assertive trade tariffs.
T. Rowe Price predicts that extending the Tax Cuts and Jobs Act (TCJA), a significant tax reduction introduced in Trump’s first term, would create a US$4tn–US$5tn deficit over the next decade.
These cuts, which Trump advocates extending, could affect sectors across the board, as policymakers may seek offsetting adjustments, including changes to clean energy incentives introduced under the Inflation Reduction Act.
Trump has voiced support for additional tax relief, although political realities may temper his ambitions, the report notes.
Gil Fortgang, Washington associate analyst at T. Rowe Price, expressed concern regarding the potential policy risks tied to funding these tax cuts.
“The president may also face pressure to come up with ways to help pay for continuing the 2017 tax cuts and for any new ones, creating potential policy risk for certain industries and sectors,” Fortgang explained.
He highlighted the energy sector as one that could see changes, mentioning that “Trump’s pre-election comments suggested that the IRA’s tax credits for electric vehicles and renewable energy could be at risk for possible repeal or adjustment.”
T. Rowe Price’s analysis suggests that Trump’s proposed trade policies, including a potential 10 percent border tax on imports and a tariff as high as 60 percent on goods from China, could influence inflation by triggering price increases across various consumer goods.
The report warns that while businesses may pass higher costs onto consumers, the full impact is unpredictable. Further tightening of immigration policy could also reduce labour availability, creating an inflationary effect through rising wages.
As Blerina Uruçi, chief US economist at T. Rowe Price, noted, “A tough stance here could result in a negative shock to the supply of workers, tightening US labor markets. Unlike higher tariffs, such a scenario likely would have a more sustained impact on prices.”
The report said the implications of Trump’s policies are equally significant for the investment landscape.
Tim Murray, capital markets strategist at T. Rowe Price, commented that US small-cap stocks may see gains if the administration eases regulatory pressures and adopts a softer stance on mergers and acquisitions.
Murray noted that small businesses, uncertain about future policies, have delayed spending and inventory-building decisions. Trump’s win could clarify these concerns, potentially encouraging increased business investment.
However, the report cautions that Trump’s policies on trade and tariffs will also likely create price inflation, which could impact bond yields and stock valuations.
Additionally, while Trump has called for a weaker US dollar, Murray acknowledged that his policies, including tariff hikes, could contribute to dollar appreciation.
BNN Bloomberg also explored how Trump's trade agenda might affect Canada, given the country's heavy reliance on US markets.
According to economist Derek Holt from Scotiabank, “C-suites and markets have reason to be very cautious toward the future,” noting that a rise in global protectionism poses risks to both US and global economic growth.
Similarly, Ian de Verteuil, managing director at CIBC, acknowledged that Trump’s ‘America First’ policy is likely to bolster US economic activity, which could have positive implications for the Canadian economy.
However, he cautioned that trade tensions and Canada’s lower defense spending could create friction with US policymakers.
Meanwhile, Canadian analysts like Laura Lau from Brompton Corp. have been reevaluating their expectations, with some seeing Trump’s pro-growth outlook as a potential advantage.
Lau remarked, “At one point, I thought the TSX might outperform the S&P, but with this, maybe not. It’s like the centre of gravity has shifted.”
Some Canadian strategists now view Trump’s policies as a potential boost for Canadian equities over time, even as current volatility underscores the risks involved.
