Since the surprise election of Donald Trump on November 5, the American financial markets have experienced unprecedented enthusiasm. Why and is it not time to be wary of this surge in stock prices?
A general increase
Massive investment flows
US equity funds recorded colossal inflows, reaching almost $140 billion in November, making it the most active month in terms of inflows since 2000.
This rush for American assets is mainly explained by the Trump administration’s promises of tax cuts and pro-business reforms. Investors appear to fully embrace the growth agenda proposed by the new president, and his choices for key administration positions are seen as favorable to the markets.
Indeed, whether it is the billionaire Elon Musk, responsible for rationalizing the weight (and cost) of the administration, or the crypto-fan Paul Akins who will become the new boss of the Securities & Exchange Commission – the famous SEC – , the nominations of pro-business figures follow one another.
The American stock market goes from record to record
This massive influx of capital propelled the major US stock indexes to a series of all-time highs. The S&P 500 is up 5.3% since Election Day, bringing its gains for the year to an impressive 28%.
Smaller companies, considered more sensitive to fluctuations in the US economy, have even outperformed, as the following chart illustrates. The Russell 2000 Index hits an all-time high for the first time in three years.
Source : Bloomberg
Unlike previous phases of increases, where technology giants alone drove the market, the current increase seems broader and healthier. Sectors such as banking, energy and manufacturing also contribute to rising stock prices.
An American phenomenon
This trend is mainly American. While November was the strongest month for flows into equity funds globally since the start of 2021, strength in the United States masks weakness elsewhere.
Investors are pulling money out of other markets perceived as more vulnerable to a potential trade war. In November, funds invested in emerging markets suffered net withdrawals of $8 billion, while investors withdrew $14 billion from the European stock market.
American exceptionalism
Analysts explain this marked preference for American assets by what they call the trade in “American exceptionalism.” Paradoxically, even when the United States poses geopolitical risks, it is seen as a safe haven.
This perception, combined with the strength of the U.S. economy and prospects for corporate earnings growth, is keeping risk appetite high.
Outlook for 2025: a widely expected rosy scenario
Although November’s breakneck pace of inflows is likely to slow, many experts expect flows to remain strong in 2025. Institutions like BlackRock, Northern Trust and Bank of America are forecasting further big gains for U.S. stocks .
They are among the many experts who remain bullish on the American market, and who recommend overweighting the exposure of investors’ portfolios to this region of the world.
Risks and warnings
However, this stock market euphoria is not without risks. Bank of America analysts have identified three main threats that could lead to a violent market correction:
- The risk of an economic recession, which could reduce earnings growth by 10 to 20 percent for S&P 500 stocks.
This recession could manifest itself if, by imposing significant customs tariffs for example, Trump’s economic policy stimulates a rebound in inflation (as imported products simply cost more)
- Retaliatory customs tariffs (notably from China or Europe), if Trump’s plans for universal customs duties come to fruition, could impact the profits of S&P companies by up to 10%.
- Finally, in such an inflationary scenario, a dramatic rise in bond yields could reduce earnings per share by an additional 10%.
In addition, some experts, such as David Roche of Quantum Strategy, include the possibility of the bursting of the speculative bubble which, according to him, is swelling dangerously in the field of artificial intelligence.
Already very high valuations
Finally, it is important to note that at current levels, the US market is already trading at historically very high valuations, which could limit future upside potential and increase the risk of a correction.
In conclusion, while the appeal of the American stock market is undeniable in the wake of Trump’s election, investors must remain vigilant in the face of potential risks and signs of market overheating. The current euphoria could quickly turn if the implementation of Trump’s program proves inflationary or destructive of long-term value.
But at the same time, it is clear that the American stock market has delivered (very) attractive returns in recent years. And that today it represents around 70% of the world market capitalization. It is therefore complex and potentially costly to stay away from this market. Because it is impossible to time the next correction in this market.
It is also in this context that we have published our 10 investment ideas for 2025. Please note, these are only suggestions and any investment carries risks of capital loss.
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