If Wall Street has learned one thing during Donald Trump’s first term as president, it’s that the stock market is one way to keep score. At various points he took credit for equity rallies, urged Americans to buy the dip, and even considered firing Federal Reserve Chairman Jerome Powell, whom he accused of selling.
Now he’s preparing for another stint in the White House, and the market is once again a major focus. The problem is that he is also rolling out a series of economic policy proposals that many strategists say increase the risk of rising inflation and slowing growth.
So for investors who have enjoyed a more than 50% jump in the S&P 500 index since the start of 2023, the best hope to keep the market rolling in 2025 and beyond is something to damage the Trump rally. Can be afraid to do.
“Trump views stock market performance as an important part of his scorecard,” said Eric Sterner, chief investment officer at Apollo Wealth Management. He routinely began his speeches in his first term as president with the question, ‘How’s your 401K?’ When the markets were riding high. So he clearly does not want to make any policies that threaten the current bull market.
The S&P 500 index opened after Trump’s victory on Nov. 5, posting its best post-election day session ever. U.S. equity funds saw a total of $56 billion in outflows in the week to Nov. 13, the most since March, according to Bank of America Corp. strategists using data from EPFR Global. And the S&P 500, the tech-heavy Nasdaq 100 Index and the Dow Jones Industrial Average have set multiple records since Election Day, despite last week’s pullback.
What makes the reaction remarkable is that Trump’s campaign promises weren’t what you’d normally think of as investor-friendly. These include: Heavy tariffs that will likely strain relations with key trading partners such as China. mass deportations of low-wage undocumented workers; Tax cuts targeted at corporations and wealthy Americans are expected to increase the national debt and increase the budget deficit. and a general protectionist approach aimed at bringing manufacturing back to the U.S., where costs are higher than overseas.
None of these risks are secrets, they are all widely discussed in investment circles. So where is the excitement coming from? Simple Wall Street doesn’t believe Trump will tolerate a falling stock market, even if it’s because of his own suggestion.
President Piotr
“If some of these policies start to affect his popularity, start to affect the stock market in a way that he thinks is negative, I think he’s going to pivot,” portfolio manager at Thornburg Investment Management said. Emily Lovell said in a statement. The interview
Or, as Barclays strategists wrote in a note to clients Thursday: “We believe the president-elect should be taken seriously, but not literally.”
The prospect of tariffs is what investors are watching most closely, as Trump regularly used them as negotiating tools in his first term, threatening to impose them and then just as quickly reversing course. It did when markets sold off in response. He dragged stocks and often ranted on social media during trade talks with China and Mexico.
This time, Trump has proposed 10% to 20% tariffs on imports from all countries. Even at the low end, that could lead to a 10% return in U.S. equities and a mid-digit drop in S&P 500 returns, according to a team of strategists at UBS. According to strategists at Barclays, a universal tariff with a proposed levy of 60% or more on goods from China would reduce the earnings of S&P 500 companies by 3.2% in 2025.
“It’s one thing to threaten tariffs to gain leverage in trade negotiations, but it’s another thing to impose them,” said Mark Malik, chief investment officer at Seibert, adding that Trump’s sensitivity to equity markets is , in theory, should weaken their approach.
Wall Street leaders like Jamie Dimon, the chief executive of JPMorgan Chase & Co., told the APEC CEO Summit in Peru on Thursday that he thinks the president-elect has hit the stock market with his tariffs. Will want to avoid triggering sales.
Still, investors are shedding risk, selling shares of companies that are expected to be hit by the tariffs. The Nasdaq Golden Dragon China Index, which includes firms that are listed in the U.S. but do business in China, is down 8.9 percent since Election Day. Coca-Cola Co. and PepsiCo Inc. has lost about 5.5% over the same period. And Hasbro Inc. fell 7.1 percent.
2016 not anymore.
Of course, the historical analogy doesn’t matter because things were very different when Trump first took office in 2017 than they are now. At the time, the S&P 500 was up 9.5% in 2016 and had fallen slightly in 2015. This time, the index has fallen for two years, jumping 53 percent since the end of 2022. In 2024 alone, it has set more than 50 records.
Interest rates were also very low in 2017, with the fed funds rate ranging from 0.5% to 0.75% compared to 4.5% to 4.75% today. And Trump isn’t getting much help from the Fed after Powell said on Thursday that there was no need to rush further rate cuts after cuts at the September and October meetings.
High equity valuations and tight fiscal conditions could limit Trump’s ability to stimulate the economy and stock market as he did in his first term, when he passed a $1.3 trillion spending bill that would boost domestic spending. There was an increase in spending on programs as well as a $1.5 trillion tax cut.
“President Trump will not be able to replicate the fiscal stimulus of his last term,” Marko Popek, chief geopolitical strategist at BCA Research, wrote in a note to clients last week. “Trump 2.0 will curb immigration and force a freeze on fiscal policy, the twin pillars of American outperformance relative to the rest of the world.”
Its risks are looming large in the bond market, at least for now, as traders bet on a selloff in Treasuries in the wake of a Trump win. According to Ed Yardini, president and chief investment strategist of Yardini Research, the key question is how much the market will bear.
“If the fear of inflation and big deficits here causes bond yields to rise significantly, then obviously the stock market is misreading it,” he said.
And the ultimate risk, in turn, is if Trump is too sensitive about what the market is doing. Interventions can also be volatile, which is generally not beneficial for equity prices, according to Seibert’s owner.
“Markets, as we all know, can be fickle,” he said. “If Trump overreacts to daily market moves as he has during parts of his first term, he could find himself, along with many others, flogging.”
