Stocks had their best week of the year as investors cheered President-elect Donald Trump’s economic agenda.
“Tax cuts are driving the rally … and overall the perception is that markets are looking like Republican administrations, even though the Democratic administration’s performance in recent years has certainly not been particularly shabby,” Steve Sosnick of Interactive Brokers told me out. on Yahoo Finance’s special election coverage.
The Dow Jones Industrial Average (^DJI) shot up more than 1,700 points from Wednesday to Friday, ending the week up 4.6%. The S&P 500 (^GSPC) and Nasdaq Composite (^IXIC) rose to a record, while the Russell 2000 (^RUT) reached its highest level since November 2021.
But the market must be careful what it wishes for. Experts tell me that as clarity emerges, a resurgence in inflation due to trade tariffs and additional government spending could pose a risk to market momentum and the Fed’s moderate rate cuts.
“The sharp peak [in the markets] is to some extent a response to expectations of solid growth, deregulation, tax cuts… But the other part of that, of course, is that it could lead to greater inflation and wider budget deficits,” Sonal Desai, Franklin Templeton Fixed Chief Investment Officer Income, told me on Catalysts.
Stifel’s Barry Bannister, who projects a downside risk of 5,250 for the S&P 500 a year from now, is keeping a close eye on a resurgence in inflation. S&P ended the week above 6,000.
“If inflation reemerges, we suspect that Chairman Powell’s final 12 months in office (May 2025 to May 2026) will pose significant investor risk, compounded by the impact of the looming 2026 U.S. midterm elections,” wrote Bannister in a letter to his clients.
Deutsche Bank expects that Trump’s fiscal, trade and immigration policies could result in an upward adjustment to the inflation forecast. The team, led by Matthew Luzzetti, forecasts that inflation could rise by around 0.5% to around 2.5% in 2026, mainly due to the inflationary impact of tariffs.
Reports on Friday said Trump has asked Robert Lighthizer to return to his administration as US trade representative, which could signal a more aggressive approach to tariffs. During Trump’s first term, Lighthizer played a key role in his escalating trade war with China, imposing tariffs on steel and aluminum imports and helping renegotiate the U.S. trade deal with Mexico and Canada.
For investors, hardware stocks are among the “most at risk” technology stocks as smartphones, PCs, tablets, wearables and servers are still mainly assembled in China, according to Morgan Stanley.
