The S&P 500 and other major U.S. indices have surged to new heights, bolstered by Donald Trump’s re-election and the Republicans gaining control of the Senate.
Trump, now the second president to secure two non-consecutive terms after Grover Cleveland, brings a dynamic shift, fueling optimism in the markets.
History tells us that political cycles have limited long-term impact on markets; economic fundamentals, rather than election outcomes, tend to drive sustained growth.
Since 1950, through 18 elections and ten transitions of power, U.S. GDP growth has averaged 3.2% annually, with the S&P 500 delivering a 9.4% annual return.
Investors should avoid portfolio pivots based solely on election outcomes. Economic themes underway pre-election are likely to continue, especially as U.S. businesses are adept at adapting to political shifts.
Nevertheless, specific policy changes may open up new opportunities. With Trump expected to reintroduce selective tariffs aimed at China, companies involved in global supply chains or end markets will need to navigate this trade policy environment cautiously.
Furthermore, financial deregulation, expected under a Trump administration, may encourage mergers and acquisitions while continuing to lift bank stocks a sector that has already outperformed the broader market since election night.
The postelection wave of optimism has lifted cyclical stocks those industries closely linked to economic swings higher than defensive stocks, reflecting confidence in growth-oriented policies.
Additionally, small-cap stocks in the Russell 2000 have surged over 6% since the election, driven by expectations of tax reform.
Small-caps, typically more reliant on the domestic economy and less exposed to international trade conflicts, stand to benefit considerably from the Trump administration’s anticipated tax cuts and deregulatory push.
Banks, specifically, are poised for gains with lowered regulatory pressures, the promise of lower corporate taxes, and a favorable growth environment.
This combination of factors underlines the sector’s robust post-election rally, up 8.2% since Trump’s win, and positions small-caps and cyclical stocks to lead the market into a period of heightened economic momentum.
On Monday, U.S. markets scaled new heights, propelled by an ongoing election-induced rally, with the Dow Jones up 0.7%, the S&P 500 adding 0.1%, and the Nasdaq briefly setting fresh records.
This upswing was sparked by Donald Trump’s election win and the Federal Reserve’s recent rate cuts, which reignited hopes for economic acceleration.
Tesla led post-election gains with a 7% rise amid speculation that it may benefit from a Trump administration, especially considering CEO Elon Musk’s cordial relations with the president-elect. Investors anticipate that the policy landscape could shift favorably for Tesla, helping the automaker sustain its meteoric rise—over 40% in the past week alone.
Meanwhile, Bitcoin crossed a historic milestone, trading above $87,000 as enthusiasm builds around potential policy support from a cryptocurrency-friendly Congress and White House. The rally in Bitcoin resonated throughout the crypto sector, with shares of crypto-linked firms surging in response. MicroStrategy, a significant institutional holder of Bitcoin, soared by 25%, while Coinbase and MARA Holdings jumped 20% and 30%, respectively, on the day.
On the earnings front, the season is winding down with most S&P 500 companies reporting favorable results—102 companies reported last week, with 75% surpassing analyst expectations. The pace of reports will slow significantly this week, with only 11 major companies scheduled. Investors seem increasingly focused on post-election themes, while robust third-quarter earnings have provided a sturdy foundation for continued market gains. As optimism remains high, markets appear set to enjoy continued momentum as the post-election landscape unfolds.
In sum, with volatility down, economic optimism up, and new policy directions anticipated, markets have entered a phase where strategic rebalancing toward long-term fundamentals could offer enhanced resilience and returns, underscoring the enduring relevance of measured, historically grounded investment approaches.
Stock market performance has historically skewed higher under Democratic administrations, but this trend is likely due more to the timing of economic cycles than to the impact of any specific party policy.
Democrats have often assumed office in the early stages of economic expansions, aligning with stronger market returns as a natural progression. Republicans, on the other hand, have occasionally taken office during mature cycles, leading to more modest gains.
As such, the state of the economic cycle arguably has a greater impact on market performance than which party holds office.
Consider the current economic landscape: if the Federal Reserve navigates a soft landing, markets may benefit from mid-cycle growth momentum. But in the event of a hard landing, markets could suffer, regardless of party leadership.
Donald Trump’s presidency notably disrupted the typical trend of first-year stock slumps, with his administration passing significant tax cuts in 2017, driving the S&P 500 up by 19.4%. This was followed by a more modest 6.2% decline in his second year but then a striking 28.9% surge in the third, illustrating that market movements often reflect cyclical dynamics over political ones.
In other words, an election doesn’t warrant drastic shifts in investment plans. Election outcomes alone rarely dictate long-term market returns, as elections occur regularly without derailing the economic trajectory. Since 1950, despite 18 elections and 10 party transitions in the White House, U.S. GDP has averaged a steady 3.2% annual growth, while the S&P 500 has compounded at a robust 9.4% yearly.
This evidence suggests that markets are driven more by the overarching economic rhythms than by the electoral cycles that punctuate them.
While it’s tempting to attribute economic outcomes to the party in power, investors are typically better served by focusing on long-term fundamentals rather than short-term political shifts.
In terms of financial market performance, a divided Congress or one controlled by Republicans has proven advantageous for stocks, regardless of the president’s party.
A Republican sweep might leave personal tax structures largely untouched but could lead to a reduction in corporate tax rates.
This change would be favorable for corporate earnings, yet would likely increase the federal deficit. Funding these tax cuts might involve new tariffs, potentially sparking market volatility, especially if broad, full-scale tariffs were enacted as part of trade policies.
Additionally, revenue from tariffs would likely fall short of offsetting the revenue loss from corporate tax cuts, heightening deficit concerns even further than current Congressional Budget Office projections.
Important Catalyst #1: Trump Vs The Federal Reserve
The Federal Reserve recently implemented a widely expected 25-basis-point rate cut, underscoring the persistence of a restrictive policy environment.
Markets, however, are split on whether another rate cut will follow in December. Chair Jerome Powell’s press conference, typically a space for cautiously worded guidance, took on a slightly charged atmosphere this time. Powell’s terse responses to questions about potential presidential influence over the Fed’s leadership have cast new light on the institution’s independence, an issue that seems to be moving from the hypothetical to the immediate under Trump’s second term.
Asked directly whether he would step down if President Trump requested it, Powell’s curt “No” left little room for interpretation. When asked whether a president could forcibly demote him, Powell responded confidently, saying, “Not permitted under the law,” with a deliberate pause that signaled a firm stance on the Fed’s autonomy. Powell’s refusal to yield to potential White House pressure marks a significant moment as Trump appears eager to challenge this independence in his new term.
Within 48 hours of the election, speculation intensified when Senator Mike Lee, a Utah Republican, called for Fed oversight by the president, ending his statement with the hashtag “#EndtheFed.”
A response from Elon Musk on social media quickly followed, seemingly endorsing Lee’s post and stirring discussion around the boundaries of executive influence over monetary policy. This could mark the beginning of a push toward reshaping the role of the Federal Reserve, something that Trump occasionally alluded to during his campaign. While the president cannot remove a Fed chair without cause, the vagueness of this legal standard means that the possibility of intervention could one day be tested in court.
The question, which may reach the Supreme Court, involves complex issues of governance, economic philosophy, and constitutional interpretation, and could have significant implications for monetary policy.
Throughout his first term, Trump’s critique of Powell’s “restrictive” approach made headlines, with the president frequently asserting that he could better handle interest rates. During campaign rallies, he often emphasized his financial success and economic intuition as qualifications for a voice in central bank policy.
Such rhetoric has laid the groundwork for what may become a broader campaign to bring the Fed more directly under the president’s oversight.
The Fed’s independence is designed to insulate it from short-term political pressures, allowing it to make policy decisions based solely on economic indicators rather than electoral considerations. However, Trump’s campaign rhetoric, coupled with renewed support from some lawmakers, hints at potential challenges to the Fed’s traditional autonomy. Should Trump seek greater influence over monetary policy, he would face substantial legal obstacles.
The Fed chair’s tenure is protected by statute and can only be terminated “for cause,” a high threshold likely encompassing more than mere policy disagreements. Defining what constitutes “for cause” might ultimately fall to the judiciary, should any president pursue such a course.
As it stands, Powell’s term, which runs through May 2026, is protected by current legal precedent, but with a second Trump term underway, the question of Fed independence may face one of its biggest tests in modern history.
For now, Powell’s responses make it clear that the Federal Reserve is committed to maintaining its independence, although how long it can do so without presidential interference remains uncertain.
In the wake of a flurry of positive economic indicators, the Federal Reserve moved to cut short-term interest rates by 25 basis points, bringing the target range to 4.5-4.75 percent, following a substantial half-point reduction in September. Financial markets, while initially responding with optimism, have begun to recalibrate, with investors factoring in the inflationary potential of president-elect Trump’s policies, including tariffs and tax cuts. These moves could complicate the Fed’s efforts to manage inflation and control the deficit, forcing a recalibration of interest rate expectations.
As Trump’s policies unfold, markets are beginning to price in a more conservative rate-cut trajectory for 2025, with fewer reductions expected. Economists have raised concerns that Trump’s trade tariffs, particularly those targeting China and other foreign nations, could fuel inflationary pressures, exacerbating the Fed’s challenge. Trump’s intention to cut corporate taxes and implement trade tariffs could spur inflation, making it more difficult for the central bank to pursue further rate cuts in line with its previous forecasts.
Powell, while acknowledging the challenges ahead, refrained from commenting definitively on the long-term impact of Trump’s proposals on the Fed’s outlook, stating that the timing and substance of policy changes are still too uncertain. He emphasized that the Fed is not rushing to reach a “neutral” rate—the point at which interest rates neither spur nor dampen inflation. However, Powell hinted that the pace of future cuts may slow, suggesting a more cautious approach to rate reductions going forward.
Further complicating the outlook, Minneapolis Federal Reserve President Neel Kashkari added his voice to the chorus of caution, warning that the potential for escalating tariffs could push inflation higher in the long term if global trade partners retaliate. Kashkari expressed concern that a tit-for-tat escalation could disrupt international trade, leading to significant uncertainty in the broader economic environment. The Fed is now facing the dual challenge of managing monetary policy while navigating the unpredictability of Trump’s economic agenda, which could create even more volatility in the markets.
As the year progresses, the market will be watching closely for any signals from the Fed regarding its approach to interest rates, inflation, and the broader economic impact of Trump’s policies. The central bank’s ability to balance inflation control with the potential for economic growth under the new administration remains a key focal point for both investors and policymakers alike.
Important Catalyst #2: Tarrifs
A tariff is essentially a tax levied on imported goods, but it’s not paid by the country exporting the goods. Instead, U.S. companies importing these products bear the cost, which leads to higher prices for consumers.
While tariffs are often seen as affecting imported goods, they can also raise the price of domestic products.
This is because the reduction in competition from overseas producers allows domestic manufacturers to charge higher prices.
A 2019 study, for example, found that Trump’s washing machine tariffs led to higher prices for U.S.-made washers and dryers.
President-elect Trump’s tariff proposals represent a bold shift towards protectionism, with plans to impose a universal 10% to 20% tariff on imports, alongside a dramatic 60% to 100% tariff on Chinese goods.
This move is intended to generate revenue, but economists warn that it may undermine the economic benefits of Trump’s proposed tax cuts. The result could be a drag on U.S. GDP growth and job creation, with potential consequences including higher unemployment rates.
If these tariffs are implemented, the ripple effects could be severe, especially for industries heavily reliant on imports from China. Products ranging from clothing and toys to electronics and appliances could see steep price increases, as many companies, including large consumer goods producers, source their products from Chinese manufacturers.
The complexity of global supply chains means that shifting production away from China may not be a feasible solution in the short term. Major retailers and consumer brands that import heavily from China, such as Wayfair, Dollar Tree, Skechers, and Crocs, have already seen their stock prices tumble in anticipation of the new tariffs. The tariffs could disrupt the flow of goods, increase costs for manufacturers, and ultimately burden American consumers with higher prices for everyday goods.
Furthermore, the risk of retaliatory tariffs from China and other global trade partners looms large. If nations retaliate with their own tariffs, the U.S. could face a full-blown trade war, with negative consequences for both global and domestic markets. Economists predict that these trade tensions could cause a significant downturn in U.S. equities, as heightened uncertainty leads to a “risk-off” environment, driving investors away from stocks and increasing volatility in financial markets.
While Trump’s policies aim to reduce trade imbalances and foster domestic production, the potential economic fallout from these measures cannot be ignored. The combined effects of increased tariffs, higher consumer prices, and the threat of retaliatory action could undermine the economic gains from tax cuts, raising doubts about the long-term benefits of this protectionist approach.
So far, the U.S. equity market appears to be largely disregarding the potential economic risks tied to President-elect Trump’s tariff proposals.
Investors seem to be holding off on a full assessment, awaiting more clarity on the actual scope and execution of the tariffs, particularly the sweeping 10% tariffs on all imports and 60% on Chinese goods.
If the tariffs were implemented as initially proposed, U.S. GDP could shrink by 1.5% and inflation rise by 0.8% over two years. In a more moderate scenario, those figures would be less severe, with GDP shrinking by 0.2% and inflation rising by 0.2%.
Despite these potential risks, the trade deficit with China has narrowed under Trump’s administration, but surging deficits with other Asian exporters may now face greater scrutiny.
This shift could prompt new concerns regarding the overall impact of Trump’s trade policies.
Important Catalyst #3: De-Regulation
Deregulation quickly became a key focus of Trump’s administration, with promises to trim unnecessary regulations to foster economic growth.
The Council of Economic Advisers (CEA), in its 2019 report, argued that these deregulatory efforts could yield substantial economic benefits, estimating that 20 key actions would save businesses and consumers $220 billion annually, roughly 1% of GDP.
The CEA highlighted examples like the repeal of an FCC rule governing the use of personal data by internet providers, which they claimed would result in significant cost savings, particularly in wireless services. However, a more recent study from scholars Coglianese, Sarin, and Shapiro contested these claims, asserting that the CEA’s estimates overstate the positive effects by ignoring variables that were also driving cost reductions at the time, such as advancements in technology or shifts in market condition.
Moreover, while some of these regulatory changes have been framed as immense economic boons, they fail to account for the broader societal costs. These costs, though not directly reflected in GDP metrics, have significant welfare implications. For example, the Office of Management and Budget (OMB) pointed out that environmental regulations from the Obama era, especially those concerning air and water quality, generated more benefits than they cost, thus highlighting the trade-offs involved in deregulation.
In practice, the impact of the Trump administration’s regulatory overhaul has often been more muted than anticipated.
Many of the proposed changes have faced delays due to legal battles, and several of the policy shifts have yet to be fully implemented. Take the SAFE Vehicles Rule, which drastically reduces fuel efficiency standards for vehicles in the 2021–2026 range; despite its announcement, automakers have seen negligible effects on their earnings. Similarly, the revocation of California’s EPA waiver, which allowed the state to impose stricter fuel standards than those mandated federally, has been delayed by ongoing court challenges. Despite efforts to streamline environmental reviews for infrastructure projects like oil and gas pipelines, opposition from states and legal hurdles have stymied or even halted some high-profile projects.
The broader effect of these deregulatory moves, therefore, remains uncertain. While some sectors might benefit from reduced compliance costs, the full economic impact will depend largely on how quickly and effectively these regulations are implemented, and whether any unintended consequences arise from the rollback of environmental or consumer protections. It is too early to declare these policy shifts a resounding success, and in many cases, their effectiveness will hinge on both legal outcomes and market reactions.
The Trump administration’s efforts to roll back regulations were touted as a historic success, with nearly 25,000 pages of regulations removed and a claim to eliminate eight regulations for every new one introduced.
The figures are striking, as regulatory costs imposed annually during Trump’s tenure averaged just $10 billion, compared to $111 billion under Obama and $43 billion under George W. Bush. However, assessing the true impact of these deregulatory actions is far from straightforward.
Many regulatory rollbacks faced immediate legal challenges and were often overturned. The Institute for Policy Integrity tracked that only about 22% of the Trump administration’s deregulatory actions challenged in court were upheld.
This highlights the complexity of implementing such an ambitious deregulatory agenda, as many of the policies that were struck down in court would have accounted for much of the administration’s claimed cost savings.
These legal hurdles underscore the difficulty of not just halting new regulations but also dismantling the existing regulatory framework.
The frequent judicial setbacks suggest that while the Trump administration may have aimed to reduce regulatory burdens, the actual long-term economic effects are more uncertain.
Important Catalyst #3.5: Opening Up M&A
A second Trump administration would likely usher in a significant deregulation agenda, particularly affecting antitrust policy and M&A activity.
The administration is expected to appoint figures who align with a more lenient stance on corporate consolidation and reduce regulatory hurdles, a stark contrast to the current administration’s aggressive antitrust efforts.
This would directly benefit major sectors such as tech, where industry giants have faced increasing scrutiny, particularly from the Federal Trade Commission (FTC). The likely ouster of FTC Chair Lina Khan would be seen as a significant win for large corporations who have faced increasing restrictions on mergers and acquisitions in recent years.
The media sector is poised to be one of the most active in this environment, with companies like Warner Bros. Discovery and Comcast considering major strategic moves, including potential mergers and acquisitions, to achieve greater scale and efficiency in an increasingly competitive landscape.
However, while there is anticipation for greater M&A activity, several obstacles remain. Market valuations are high, making it more difficult for buyers to secure companies at favorable prices.
This, coupled with rising interest rates driven by inflation concerns and a tightening bond market, has made financing more expensive. The increasing cost of capital, especially in leveraged buyouts, has already been a challenge, though private equity firms remain active.
In fact, 2024 has already seen a notable increase in leveraged buyouts, with at least $94 billion in takeovers announced, reflecting a 63% increase from 2023. There is a significant amount of capital, or “dry powder,” waiting to be deployed, and private equity firms are under pressure to invest it, which could prompt more deals as they look to return value to investors.
On the other hand, the rising inflationary environment, driven in part by policies such as tariffs, could pose additional challenges to M&A activity. Trump’s proposed tariffs—particularly the notion of placing 10% to 20% taxes on all imported goods and much higher tariffs on Chinese goods—are likely to lead to higher costs across various industries, from electronics to consumer goods.
This could put additional pressure on companies involved in global supply chains and force them to reconsider their strategic options, potentially affecting the timing and structuring of M&A deals.
While Trump’s victory may be seen as a boon for deregulation and the M&A landscape, the market is still on edge, waiting for greater specificity from his administration on key policy areas. The evolving dynamics of tariffs, interest rates, and government spending could have significant ramifications for the broader economy, and the stock market is particularly sensitive to these changes.
In summary, while Trump’s second term may foster a more pro-business, deregulated environment, particularly with regard to M&A activity, there are still considerable uncertainties. Companies are adjusting to the rising cost of capital and the potential for higher inflation, both of which could slow down the pace of transactions. However, the long-term outlook remains cautiously optimistic, as many firms are expected to accelerate their M&A strategies, driven by the broader trend of regulatory easing and a shift toward more Wall Street-friendly policies.
Important Catalyst #4: IPO Market Opening Up
This year, nearly $40 billion has been raised through IPOs on U.S. exchanges, reflecting a significant 64% increase from the same period in 2023.
However, this remains below the pre-pandemic averages, including the three years of President Trump’s first term. Despite this uptick, many of the most anticipated IPO candidates like Chime and Skims have been reticent about setting specific timelines, able to afford more patience.
Companies today benefit from a broader array of funding sources, allowing them to stay private longer. Venture capitalists are targeting so-called “decacorns”startups valued at $10 billion or more with many firms raising multiple rounds, extending even into Series E and F this year. Given this environment, a sudden wave of IPO activity appears unlikely, as the list of companies with SEC filings remains relatively short.
However, a market rally such as Wednesday’s could prove to be the spark for already-listed companies to take advantage of improved conditions, raising additional capital for growth while providing liquidity to insiders seeking an exit.
This liquidity strategy is likely to become more attractive as market sentiment improves, paving the way for increased capital-raising activity down the line.
Important Catalyst #5: Bitcoin & Crypto
The cryptocurrency sector has seen a dramatic surge since Donald Trump’s election victory, with Bitcoin surpassing the $88,000 mark and Ether following suit.
This rally is largely fueled by Trump’s strong pro-crypto stance during his campaign, which included vows to make the U.S. a global hub for cryptocurrency and to bring Bitcoin mining within its borders. Although Trump’s proposals to overhaul the regulatory landscape face challenges, analysts believe that his presidency could lead to a surge in crypto valuations, with some predicting Bitcoin could hit $125,000 by year-end.
Additionally, Trump’s victory was bolstered by a notable win for the cryptocurrency community in the Ohio Senate race. Bernie Moreno, a blockchain entrepreneur, defeated longtime incumbent Sen. Sherrod Brown, who had been an outspoken critic of loosening cryptocurrency regulations. Moreno’s victory is seen as a significant step toward a more crypto-friendly regulatory environment in Washington.
These developments have left analysts and market participants optimistic, with some suggesting that the crypto sector is poised for substantial growth under the incoming administration.
The expectation is that regulatory shifts will favor the digital currency space, allowing it to thrive in a more favorable legislative environment. However, the full extent of these changes remains to be seen, with significant hurdles still ahead in terms of both legal and market dynamics.
But, for now, the crypto world is experiencing a boom, with investors looking to capitalize on what they perceive as an opportunity for substantial gains.
