(Bloomberg) — For investors looking beyond the initial risk-on rally in U.S. stocks after Donald Trump’s decisive election victory, now comes the hard part.
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The Republican president-elect has made numerous campaign promises: high tariffs, tax cuts, business-friendly deregulation and stricter immigration laws, to name a few. For investors who piled into stocks last week on speculation that Trump’s policies will strengthen the economy, the challenge is figuring out which sectors will get a lasting boost.
For example, tariffs could fuel inflation and hurt large multinationals, while potentially helping domestic small-cap stocks. However, the crackdown on immigration threatens to increase labor costs, likely putting pressure on smaller businesses. Meanwhile, a friendly attitude toward traditional energy that boosts production could push oil prices lower, and efforts to repeal President Joe Biden’s policies aimed at helping the clean energy and electric car industries may struggle to pass Congress .
“I expect active investors will start using a scalpel to dig through at the sector level to see which companies and sectors can benefit now,” said Eric Clark, portfolio manager at Accuvest Global Advisors. “Over time we will get more data points on what will actually be implemented and how we can play that out.”
Clark has already taken advantage of a number of opportunities. While banks, industrials, energy and big technology stocks pushed the stock market higher on Wednesday, he sold off some technology and financial stocks. He also bought stocks in luxury retail and consumer goods, which were in the red during the surge.
Small-cap stocks rose last week and appear to be in a good position as traders assess the potential policy backdrop. These companies, which earn most of their revenues domestically, will benefit from increased protectionism. A possible corporate tax cut should also help.
Trump has proposed a blanket tariff of 10 to 20 percent on imports, and as much as 60 percent on goods made in China. The prospect that at least some tariffs will materialize helped propel the Russell 2000 Index – a benchmark for small-cap stocks – soaring 8.6% last week. Digital payments company Sezzle Inc., one of the biggest gainers on the meter, doubled in that time.
Financial stocks are also seen as strong, given Trump’s promise to make changes to regulators that have pursued stricter banking rules under Biden. As banking analyst Mike Mayo of Wells Fargo & Co. sees, a new era of deregulation could boost Wall Street profitability. The shares of Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. soared after Trump’s victory.
“Stocks are eager to price in Trump’s domestic growth policies through small-caps, and hope for easier regulation” by betting on shares of financial and big-tech stocks, said Venu Krishna, a U.S. equity strategist at Barclays.
Industrial and machinery companies, such as Caterpillar Inc., are poised to benefit from a focus on domestic production of energy and mining commodities.
Jefferies analyst Stephen Volkmann reiterated that Caterpillar is his top pick in the sector, noting in part its limited exposure to China. He also said that industrial supply distributors, companies like Fastenal Co. and WW Grainger Inc., have a strong track record of passing on cost increases, for example through higher rates.
The prospect of an immigration crackdown is a potential headwind that investors are watching closely. Still, there are some companies that could benefit, such as private prison operators like CoreCivic Inc. and GEO Group Inc.
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Meanwhile, some on Wall Street are expressing doubts about some post-election market moves.
Stocks in the traditional energy sector, which includes oil and gas companies, rose after Trump’s election, given his pro-oil stance. Still, industry observers warn that efforts to relax regulations to allow more fossil fuel extraction on public lands risk creating a supply glut that would drive down prices.
Retailers, given their generally high exposure to China through the supply chain, have slumped over the past week, and they are likely to be in investors’ crosshairs as the discussion about tariffs increases. Discount chains and home furnishings companies may see the biggest impact, says Barclays analyst Seth Sigman. He called out companies including Five Below Inc., Dollar Tree Inc. and electronics retailer Best Buy Co.
Still, according to Accuvest portfolio manager Clark, some consumer businesses appear attractive because any rate increases are unlikely to be applied equally across the board.
“I’m less concerned about heavy tariffs on European luxury brands, such as LVMH Moet Hennessy Louis Vuitton, Hermes International, L’Oréal and Ferrari NV, than I am about the tariffs likely to apply in China,” he said.
The picture is also complex for another sector that took a hit last week: clean energy and renewables. The iShares Global Clean Energy ETF is having its worst week since March.
However, the outlook may not be so bleak. Trump has said he plans to roll back the Inflation Reduction Act — which aims to boost the use of clean energy, including electric vehicles — but analysts see little chance of a full rollback. A big reason is that the law has led to a wave of investment in Republican districts.
According to RBC Capital Markets analyst Christopher Dendrinos, the specter of a shift will act as an overhang for the sector as investors wait for clarity.
“On the other hand, the expectation that policy changes will take a long time to make and even longer to be implemented reduces the overall impact and could change again under a different administration,” he said.
Other elements of Trump’s policies could even help some stocks, Dendrinos said.
The analyst expects First Solar Inc. and Fluence Energy Inc. will outperform their peers given the prospects for a protectionist agenda and strong domestic demand.
–With help from Katrina Compoli and Eleanor Harmsworth.
