Donald Trump’s victory in the American elections was a real earthquake for the markets. His re-election as president brought back to the market the “Trump trade”, that is to say an investment approach which bets on the potential winners of his mandate and reduces the exposure to the possible losers. The Republican promised to break with the Democratic legacy and pledged to impose tariffs or tax cuts. The different asset classes were quick to react because Trump leaves no one indifferent. Now the big question arises in the long term. Although the “Trump trade” has become the driving force of markets in recent weeks, there are also elements beyond the influence of the US administration that could be the catalyst for investor movements in the months to come.
What is indisputable is the president-elect’s ability to move the markets in the short term. After learning of their victory, European stock markets dealt with real fear, the Ibex 35 closed its worst session in a year and a half, the euro recorded its biggest fall since 2020 and Wall Street, the dollar and the bitcoin embarked on a spectacular fall. rally.
The “Trump trade” starts with the banking sector
Its policies directly affect a wide range of stakeholders. The banking sector is one of the specific sectors that are receiving special attention and its future will depend on regulation. “Republicans will restore Trump’s deregulatory policies,” the party platform states. During its previous term, the US Congress repealed parts of the Dodd-Frank Act, which meant that smaller or regional banks were exempt from stricter Federal Reserve (Fed) regulation. This measure was called into question in March last year when financial strains emerged at regional banks and Silicon Valley Bank (SVB) collapsed.
Despite this, less control in this area would be beneficial for banks, as it would mean that the sector could do more business and take on more risk. Two major boosts are expected for the banking sector, both from an interest and non-rate income perspective.. On the one hand, the next phase of government is expected to lead to higher inflation, which would lead to higher interest rates and less easing from the Federal Reserve (Fed). Furthermore, deregulation could encourage the financial sector to carry out more transactions and investments.
“Financial entities and, in particular, banks, should benefit from a review [al alza] rate outlook and a push for deregulation which should lead to greater activity on the primary market”, summarizes Mathieu Rachat, head of equity research at Julius Baer.
An iShares ETF that tracks the price of regional U.S. banks rose 11% in the run-up to the election, in a single day, and, after its nomination, appreciated another 2%.
The tax reduction and its impact on small listed companies
Overall, the US stock market is also among the big winners. Since Election Day, November 5, $1.8 trillion has been invested in U.S. stocks, according to Bank of America (BofA) data. The continued growth of this river of money will depend in part on tax cuts. Trump promised he would cut taxes and provide tax credits because the burden “spurred” economic growth, the program notes.
“Trump’s election campaign will support economic growth through expansionary fiscal policy, with Congressional approval to extend temporary tax cuts. We have revised upward our outlook for gross domestic product (GDP) and inflation,” said economist David A. Meier. at Julius Baer. The Republican Party has promised that cuts that were temporary in the previous phase would now be permanent.
If these measures are implemented, companies will be able to benefit from reduced tax charges. In addition to the fact that Wall Street returned to historic highs several sessions after the vote (even if it corrected this week), the Russell 2000, the least capitalized index, reached its highest in three years.
Customs duties: enough to fuel the rise of the dollar
Trump’s shock to markets is reflected in the dollar, which is at a 55-year high based on the real exchange rate, according to BofA data. “The dollar is our currency and your problem,” the entity quips about the strengthening of the currency, detrimental to the rest of the world outside the United States.
One of the strengths of the Republican strategy lies in customs duties, which benefit the dollar. “Trump needs the revenue from tariff hikes given that America is already in a very precarious fiscal situation,” says Carsten Brzeski, global head of macroeconomics at ING. The expert specifies that this measure will not materialize before the summer, because he believes that the president will first tackle the trade war with China. Republicans want to impose tariffs to close the multibillion-dollar trade deficit in goods.
The counterpart is clearly found in Europe and China. The Old Continent buys liquefied natural gas or military equipment from the United States and continuing these purchases can be very expensive – and even more so with a weakened euro and a stagnant economy. As for the Asian country, everything will depend, once again, on when Trump materializes customs tariffs. What is clear is that Chinese companies doing business in the country will suffer. Overall, this protectionism and desire to put America first will weigh on customers and sellers of the world’s largest power. The impact of this tax on trade will depend on the ability of these economies to find other trading partners and alternative links.
Cryptocurrencies celebrate Trump support
Finally, cryptocurrencies are among the big winners of the elections. Especially bitcoin. The former and future president did not skimp on the oaths: he will create a strategic national bitcoin reserve and make the United States the bitcoin capital of the world. In this case, we need to see in detail which of these promises ultimately comes true. Only three axes are included in the program: guaranteeing the right of Americans to mine cryptocurrencies, to operate with decentralized wallets and to promote cryptocurrencies; This last point is generic.
Either way, the fact that the leader of the world’s greatest power is embracing cryptocurrencies so forcefully is a real bullish argument. For now, experts are hopeful that there will be more lax regulation of digital assets, but perhaps the kind of government adoption some are expecting with Trump is still very premature. The main “crypto” has appreciated by nearly 33% since the Republican victory and renewed all-time highs several times, peaking above $92,000.
What remains of the “Trump Trade”? AI is the key
At a time when stock valuations are relatively high, the stock market needs support from an external element to justify the prices currently being paid for listed companies. Some sectors, such as banking, are confident that regulatory easing by the Trump administration could end up boosting their profits beyond expectations, and in general the stock market expects that cuts in corporate taxes are fueling the bull rally. continue. However, there is another element, as important or even more important than Trump’s election promises, which could be the catalyst for the stock market rise in the months to come: the development of artificial intelligence.
As Morgan Stanley explains, “investors will have to face high stock market valuations,” they recognize. “Even with the Fed rate cut, bond yields have risen in recent weeks as investors price in inflation risk and high U.S. debt,” they note. For Morgan Stanley, “a real economic interest rate of 2% is associated with valuation multiples of 17 times on the American stock market. However, this ratio is 23 times, which makes listed companies vulnerable”, underline -they.
At these multiples, the stock market needs a boost from Trump’s tax reform, or from an external element like artificial intelligence. For many analysts, it will be the main catalyst for corporate profits in the years to come, and it appears that investors are trusting AI to justify the high valuations paid in the US stock market. Indeed, the consensus of analysts collected by Bloomberg forecasts increases of almost 10% for next year in the S&P 500, since they estimate that the index will reach 6,450 points in 2025.
China’s stimuli
In the latest survey of fund managers published monthly by Bank of America, there is one item that stands out above the rest as the factor that could help the markets the most next year and, surprisingly, this These aren’t the tax cuts that Trump promised. For most of the managers interviewed, the Chinese recovery is the most important element for the rise of the markets in 2025, beyond rate cuts, the development of AI, tax cuts or the geopolitical conflicts that ‘they sort it out themselves. AND China is now largely dependent on government stimulus measures, in a highly interventionist economy.
To justify a new upward surge in stock markets, even the American markets are partly linked to the performance of China, which continues to face a crisis that has already lasted for several years. This is another factor that could move the market, apart from the “Trump Trade”.
Federal Reserve Monetary Policy
Outside of Trump’s orbit of power, there is a key element for market performance: the monetary policy of the Federal Reserve. In some sense, the Fed’s decisions about whether to lower or raise rates are linked to government policies, and even more so in this case, in which Trump is expected to generate a new inflationary impulse with some of his measures (customs duties and immigration policy). ), even if this price increase will not reach the maximum levels observed in recent years.
With its measures, the Fed creates an economic context that can be favorable, or negative, for the stock markets. If rates fall, this generally supports stock markets as financing conditions ease and companies have more room to maneuver. However, if rates do not fall as much as expected, this could dampen the rise of the main indices, or even cause a crash if we assume that companies will suffer.
This same Thursday, when Jerome Powell suggested that the Fed would slowly begin the process of lowering rates, the market suffered it in the flesh, and the stock markets ended the week with declines, partly infected by expectations of less aggressive measures. rate cuts in the coming months. The Fed is independent, and while there have been attempts at interference by Trump in the past, Powell will likely want to maintain the course he considers most appropriate, which will affect the S&P 500’s movements in the months ahead. future.
