(Bloomberg) — If Wall Street has learned one thing during Donald Trump’s first term as president, it’s that the stock market is one way he keeps score. At various times he took credit for stock rallies, urged Americans to buy the dip, and even considered firing Federal Reserve Chairman Jerome Powell, whom he blamed for a sell-off.
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Now he is preparing for a new period in the White House, and the market is once again central. The problem is that he is also coming up with a series of economic policy proposals that many strategists say increase the risk of rising inflation and slowing growth.
So for investors who have enjoyed the S&P 500 Index’s 50%-plus jump since the start of 2023, the best hope for keeping the market rolling into 2025 and beyond may be Trump’s fear of doing whatever it takes to to damage the rally.
“Trump sees stock market performance as a key part of his scorecard,” said Eric Sterner, chief investment officer at Apollon Wealth Management. “He regularly began his speeches as president in his first term by asking, ‘How’s your 401K?’ when the markets were going high. So he clearly doesn’t want to create policies that threaten the current bull market.”
The S&P 500 Index took off after Trump’s victory on November 5, posting its best post-election session ever. As much as $56 billion flowed into U.S. stock funds in the week through Nov. 13, the most since March, according to Bank of America Corp. strategists. based on data from EPFR Global. And the S&P 500, the tech-heavy Nasdaq 100 Index and the Dow Jones Industrial Average have all hit multiple records since Election Day, despite last week’s pullback.
What makes the response remarkable is that Trump’s campaign promises were not what you would normally consider investor-friendly. These include: high tariffs that will potentially strain relations with key trading partners such as China; mass deportations of low-wage, undocumented workers; tax cuts targeted at corporations and wealthy Americans, which are expected to increase the national debt and widen the budget deficit; and a general protectionist approach aimed at bringing production back to America, where costs are higher than abroad.
None of these risks are secret; all have been extensively discussed in investor circles. Where does the enthusiasm come from? Simple. Wall Street doesn’t believe Trump will tolerate a stock market decline, even if it is caused by one of his own proposals.
Chairman Turn
“If some of these policies start to affect his popularity, start to affect the stock market in a way that he sees as negative, I think he will reverse,” Emily Leveille, portfolio manager at Thornburg Investment Management, said in an interview.
Or, as Barclays strategists put it in a note to clients on Thursday: “We believe the president-elect should be taken seriously, but not literally.”
Investors are watching the possibility of tariffs most closely as Trump frequently used them as a negotiating tool during his first term, threatening to impose them and then just as quickly changing course when markets sold off in response. Along the way, he monitored stock prices as trade negotiations with China and Mexico dragged on and often played out on social media.
This time, Trump has proposed a 10% to 20% tariff on imports from all countries. Even at the downside, that could lead to a 10% decline in U.S. stock prices and a single-digit decline in S&P 500 earnings, according to a team of strategists at UBS. The universal tariff, combined with a proposed tariff of 60% or more on goods from China, would shave 3.2% off the profits of S&P 500 companies by 2025, according to Barclays strategists.
“Threatening tariffs to gain an advantage in trade negotiations is one thing, but imposing them is another,” said Mark Malek, chief investment officer at Siebert, adding that Trump’s sensitivity to stock markets should in theory temper his approach .
Wall Street leaders like Jamie Dimon seem to agree, with the CEO of JPMorgan Chase & Co. Thursday at the APEC CEO Summit in Peru, he said he thinks the newly elected president will want to prevent a sell-off in the stock market with his tariffs.
Nevertheless, investors are coming to terms with the risk and selling shares of companies expected to suffer from the tariffs. The Nasdaq Golden Dragon China Index, which includes companies listed in the U.S. but doing business in China, has fallen 8.9% since Election Day. Coca Cola Co. and PepsiCo Inc. have each lost about 5.5% over the same period. And Hasbro Inc. has fallen by 7.1%.
Not 2016 anymore
Of course, historical analogies may not matter, because the circumstances when Trump first came to power in 2017 were so different than they are today. At the time, the S&P 500 posted a 9.5% gain in 2016 and a slight dip in 2015. This time around, the index is two years in the making, up 53% since the end of 2022. It has set more than 50 records in 2024 alone .
Interest rates were also much lower in 2017, with the fed funds rate between 0.5% and 0.75%, compared to a range of 4.5% to 4.75% today. And Trump may not get much help from the Fed after Powell said Thursday there was no need to rush into further rate cuts after the cuts at the September and October meetings.
High stock valuations and tight financial conditions could limit Trump’s ability to stimulate the economy and stock market, as he did during his first term, when he passed a $1.3 trillion spending bill that slashed spending on domestic programs increased, as well as a $1.5 trillion tax cut.
“President Trump will not be able to replicate the fiscal stimulus measures of his previous term,” Marko Papic, chief geopolitical strategist at BCA Research, wrote in a letter to clients last week. “Trump 2.0 will curb immigration and be forced to rein in fiscal policy, the twin pillars of US outperformance relative to the rest of the world.”
The risks of this are becoming more apparent in the bond market, at least for now, as traders bet on a sell-off in government bonds in the wake of Trump’s victory. How much the market will tolerate is a key question, said Ed Yardeni, president and chief investment strategist at Yardeni Research.
“If bond yields here rise materially because of fears of inflation and bigger deficits, the stock market is clearly wrong,” he said.
And the final risk, counterintuitive, is that Trump is too sensitive to what the markets are doing. Interference can also be destabilizing, which is generally not good for stock prices, Siebert’s Malek said.
“Markets, as we all know, can be temperamental,” he said. “If Trump is too reactive to daily market movements, as he was during some passages of his first term, he, like many others, may end up with whiplash.”
–With help from Alexandra Semenova.
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