How Trump’s election is forecast to affect US stocks

In the aftermath of this year’s presidential election, the S&P 500 reached an unprecedented high, largely attributed to the diminishing uncertainty surrounding the election’s outcome. Brian Garrett, the head of Equity Execution at Goldman Sachs, pointed out that many investors didn’t foresee a clear resolution by the Wednesday after the election, a stark contrast to past elections, which could drag on for days, if not weeks.

This swift clarity prompted U.S. stocks to surge as a significant number of investors had previously adjusted their portfolios to mitigate risk due to the election’s unpredictable nature. Garrett noted that investors swiftly re-engaged in strategies akin to those successful in the 2016 presidential race, turning their focus toward sectors like financials, small-cap stocks, technology, and energy.

The recent resolution of political uncertainty has proven to be a crucial driver for stock market performance. Historically, the S&P 500 has posted a median return of about 4% from Election Day to the end of the calendar year. This, combined with resilient economic growth data and anticipated interest rate cuts by the Federal Reserve, paints a promising near-term outlook for U.S. equities.

However, a potential increase in 10-year Treasury yields could pose a challenge. Rising yields often indicate increased borrowing costs, which could dampen stock valuations and limit the extent of any rally. Notably, 10-year yields have risen to around 4.4%, up from a previous low of 3.6%. Typically, such increases in interest rates would correlate with declines in equity prices. Yet, in this instance, the stock market has largely remained unscathed, as the rise in yields is primarily a reaction to improved economic data.

As investors anticipate policy adjustments post-election—despite Inauguration Day being months away—there’s evident rotation in stock portfolios. Current trends suggest that financial stocks, fossil fuel companies, and smaller capitalization stocks may perform better than the broader market, while renewable energy stocks could lag.

Trade policy remains a focal point for many investors, particularly with the prospect of tariffs. There are expectations that the newly elected president may introduce tariffs on imports from China, potentially averaging an additional 20%. This anticipatory measure could have implications not just for trade dynamics but also for broader economic outcomes; Goldman Sachs research warns that the uncertainty stemming from such tariffs might create a more significant economic impact than the tariffs themselves.

Reflecting on prior trade conflicts during Trump’s previous administration from 2018 to 2019, certain sectors like utilities, telecom services, and real estate outperformed. Conversely, industries such as automobiles, capital goods, and technology hardware typically faced more challenges during these periods.

Looking forward, the landscape for mergers and acquisitions (M&A) could be favorable under a Trump administration. Although it may take time for policy uncertainties to diminish, the potential for relaxed antitrust regulations is a possibility that could foster an uptick in M&A activity. Continued economic expansion, paired with increased confidence among corporate leaders, could provide a robust backdrop for corporate consolidation efforts.

Goldman Sachs Research estimates that by 2025, corporate spending may reach $4 trillion, with expectations that this will be nearly split between returning cash to shareholders—through buybacks and dividends—and investing in growth via capital expenditures, research, development, and M&A activities.

The initial signs suggest that the environment is becoming more conducive for public offerings as well. Goldman Sachs Research has developed an IPO Issuance Barometer to evaluate the macroeconomic landscape’s favorability for new equity issuances. Increased IPO activity could be on the horizon as market conditions stabilize and investor confidence returns.

In summary, the evolving political landscape influenced by the recent presidential election is likely to reshape the fabric of U.S. stocks in various ways. While uncertainties remain, the immediate outlook appears to hold promise for several sectors, provided that economic fundamentals remain strong and policy directions become clearer. Investors are advised to remain vigilant and adaptable as they navigate this complex environment in a post-election landscape. The intersection of politics, economics, and market dynamics makes this a critical time for decision-making in the world of finance.

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