A street sign for Wall Street is seen outside the New York Stock Exchange (NYSE) in New York City
by Lewis Krauskopf
With the return of Donald Trump to the White House, Wall Street anticipates the possibility of lower taxes, deregulation in several sectors and the new situation with an American president quick to speak out on all types of subjects, ranging from the stock market to the dollar.
Projections from the Edison Research Institute and American media show that the Republican candidate won the American presidential election against outgoing Democratic Vice-President Kamala Harris, whom he beat in several of the so-called “pivotal” states (“pivotal” states (“pivotal” states (“pivotal”). Swing States”) considered decisive for the vote.
Donald Trump has made customs duties and tax cuts strategic elements of his economic program, an issue placed at the forefront by many voters. The billionaire also intends to carry out deregulation in areas ranging from the banking sector to cryptocurrencies.
The promise of implementing such a policy has already driven up many financial assets, including the dollar, shares of regional banks and the price of bitcoin.
With a Trump administration, “the markets generally think it is favorable for growth, even if it is accompanied by higher inflation and interest rates,” explains David Bianco, head of investments for the Americas at DWS Group.
While political events can move markets, investors say they generally tend to take a back seat to macroeconomic forces and corporate health, as well as global events.
For example, the S&P 500 index rose nearly 70% during Donald Trump's first term, thanks to soaring technology stocks, even as his tariff policies caused bouts of volatility . At the same time, the energy sector suffered heavy losses as the global economy was crippled by the COVID-19 pandemic. The Trump administration at the time was nevertheless favorable to the development of fossil fuels.
THE ECONOMIC SITUATION HAS CHANGED SINCE 2016
The election of Donald Trump in 2016 sparked the so-called reflation trade, with investors snapping up an array of assets like copper futures and shares of construction companies, convinced that tax cuts and other stimulus policies would boost U.S. economic growth.
But the economic landscape has changed, and some investors say the moves of 2016 don't provide a clear road map for how stocks, bonds and the dollar will move in the months to come.
The US economy recorded an annualized GDP growth rate of 2.8% in the third quarter of 2024, compared to just under 2% in 2016. And while months of restrictive monetary policy have helped reduce inflation compared to at 40-year highs reached in 2022, some investors now fear a reacceleration of consumer prices via new customs duties or tax cuts.
Signs of a resumption of inflation could also lead the American Federal Reserve (Fed) to review its trajectory in terms of key rates. The central bank is just beginning to ease monetary policy after aggressively raising interest rates to curb high inflation.
Donald Trump's victory in 2016 “came as a general surprise, the positive market reaction was also a surprise, and investor positioning heading into the election was for a disinflationary backdrop,” the strategists wrote Monday from JPMorgan.
This time, in the final weeks of the race for the White House, the markets clearly bet in favor of a victory for Donald Trump over Kamala Harris.
CUSTOMS DUTIES AND TAX REFORM
The implementation of the customs duties that Donald Trump has pledged to impose with an increase of 10% on all imports and 60% on products from China could make a big difference in the way investors approach asset markets in the coming months.
According to a study by Deutsche Bank, a waiver by Donald Trump of these customs duties would allow the American economy to benefit from approximately half a percentage point of additional GDP. An application of customs duties would reduce GDP by around a quarter of a point, according to the same study.
“Question marks will remain over how aggressive Trump will be on tariffs regardless of the composition of Congress, given that they can be imposed by executive order,” said Garrett Melson, a strategist at Natixis Investment Managers.
Donald Trump also wants to reform corporate taxation, in particular by reducing the corporate tax rate to 15%, for companies that manufacture their products in the United States, after having reduced this rate from 35% to 21% under his first term, between 2017 and 2021.
These tax cuts – which will need to be passed by Congress – could support corporate profits and investor sentiment, although the magnitude of the boost remains to be seen.
According to estimates by Goldman Sachs strategists, reducing the tax rate to 15% would increase profits of companies making up the S&P 500 index by about 4%.
“In the short term, equity investors will look favorably on a Trump victory because it is possible that he will extend the current tax cuts,” notes Jake Seltz, manager at Allspring Global Investments.
At the same time, broad tax cuts could raise concerns about mounting U.S. debt as investors increasingly focus on the federal deficit. Concerns about the deficit have recently weighed on US public debt, pushing the yield on 10-year Treasury notes, which moves inversely to bond prices, to 4.471% on Wednesday, its highest level since July.
Donald Trump's tax and spending plans would increase the debt by $7.75 trillion over the next decade, according to an October 28 estimate from the Committee for a Responsible Federal Budget. (Committee for a Responsible Federal Budget), a budget think tank.
Donald Trump's propensity to speak out on a wide range of issues likely to influence the market is also a cause for concern. During his first term, he often spoke on subjects as varied as the strength of the dollar, trade and business initiatives. These comments have sometimes triggered movements in financial assets.
“The markets are a little nervous at the idea that a Trump administration will be accompanied by a multitude of declarations that will be difficult to sort through,” notes David Bianco of DWS Group.
(Reporting Lewis Krauskopf; written by Ira Iosebashvili; French version Claude Chendjou, edited by Augustin Turpin)
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