After the astonishing increase in stock market indices following the election of Donald Trump, Wall Street calmed down during Tuesday’s session due to profit taking.
Nothing could be more normal after seeing the American indices explode by 5 to 6% in the space of barely five sessions, that is to say from last Tuesday, the day of the election, until Monday. Concretely, this stock market surge resulted in gains on paper of around 3,000 billion US dollars! It’s crazy brat!
- Why did the American stock market rise so sharply following Donald Trump’s victory?
Because investors believe that with Trump’s arrival in the White House, he will put forward a series of fiscal and financial measures that will stimulate the American economy, while allowing businesses to grow their profits.
Now, I would like to remind you that the long-term evolution of the stock market is still based on fundamental data, notably the price-earnings ratio.
With the surge in American stock indices, we have reached very high price-earnings levels. Take the main American index, the S&P 500 of the New York Stock Exchange. As of Monday’s session, it was trading at 30.7 times the earnings of the companies that make up the index.
At 30.7 times earnings, that’s… twice as high as the median price-to-earnings in the history of the S&P 500, while that median level is 15.03 times earnings.
2. Does Donald Trump’s return to the White House justify the current immense excitement among investors?
Let me set the record straight. Since the start of 2024, American indices have risen sharply. As of Monday’s close, here are the increases recorded since the start of the year:
– Dow Jones: 17,5%
- – S&P 500: 25,8%
- – NASDAQ: 28,6%
- – Russell 2000: 20,1%
Meanwhile, the Toronto Stock Exchange barometer, the S&P/TSX, posted a gain of 18.3%. Other markets showing substantial gains this year are the German DAX (+16.1%), the NIKKEI 225 (+18.1%), the HANG SENG (+19.8%) and the Shanghai Composite (+16 .6%).
In light of the huge stock market gains recorded so far in 2024, let’s agree that the markets, especially the US market, are already pricing in strong future earnings increases. In clear terms, a lot of good economic news to come is already expected in the current high level of stock market indices.
This does not mean that the indices have reached their highest level before the next severe stock market correction occurs. One thing is certain, the stock market is currently at its peak. There are almost no bargains. The stock market has reached a very high level of risk.
This is certainly not the time to show off by “playing” the Stock Market on margin, that is to say with borrowed money.
- Are there any caveats to consider?
In an open letter to Donald Trump, famous portfolio manager Warren Buffett reminds him that “a lot has changed in the economy” since he left office in 2021.
“You inherit an incredible recovery. But that can change quickly. Inflation may not be entirely vanquished, and consumers are worried about the future. The stock market has welcomed your victory, but will be quick to abandon you if economic gains do not continue.”
Here is his some friendly advice to Donald Trump:
1. Be careful not to revive inflation.
2. Beware of imposing customs duties that will increase prices.
3. Immigrant deportation raids that reach homes and workplaces will create an ugly sight.
4. Measures abruptly restricting the labor force risk raising inflation. If this is the case, Chairman Jerome Powell of the FED will not hesitate to reverse course and stop the reduction in the key rate if conditions change.
5. Firing Powell, or weakening his authority, would not be welcome. Markets generally trust the Fed.
6. Elon Musk’s suggestion to cut $2 trillion in federal spending is not credible because it would require brutal cuts to Social Security and Medicare.
7. As Musk is involved in litigation with the Securities and Exchange Commission and other agencies and his business relies on government contracts, it will be important to screen his advice.
That said, Warren Buffett reminds Donald Trump that the implementation of all his electoral promises would increase the budget deficit, which already amounts to 7% of American GDP. He also reminds him that the federal debt will exceed 106% of GDP, the same level as the record established after World War II, according to the Congressional Budget Office.
Final caveat: “The stock market is not the economy, of course, but you’d probably rather see it in the green than in the red.”
