Donald Trump’s victory in the US elections has been a real earthquake for the markets. His re-election as president has returned the ‘Trump trade’ to the market, that is, an investment approach that bets on the potential winners of his mandate and reduces exposure to possible losers. The Republican has promised a break with the Democratic legacy and has committed tariffs or tax cuts. The different asset classes have not been slow to react because Trump leaves no one indifferent. Now, the big question is in the long term. Although the ‘Trump trade’ has become the driving force of the markets in recent weeks, there are also elements outside the influence of the US administration that could be the catalyst for investor movements in the coming months.
What is indisputable is the president-elect’s ability to move the markets in the short term. After learning of their victory, the European stock markets traded with real fear, the Ibex 35 closed its worst session in a year and a half, the euro registered its biggest fall since 2020 and Wall Street, the dollar and bitcoin embarked on a spectacular rally.
The ‘Trump trade’ begins with banking
Its policies directly affect a wide range of stakeholders. Banking is one of the specific sectors that are in focus and its future will depend on regulation. “Republicans will restore Trump’s deregulatory policies,” the party’s platform states. In its previous term, the US Congress repealed parts of the Dodd-Frank Act, which meant that smaller or regional banks were exempt from the stricter regulation of the Federal Reserve (Fed). This measure was questioned in March last year when financial tensions arose in regional banking and Silicon Valley Bank (SVB) collapsed.
Despite this, less control in this area would be beneficial for banks, since it implies that the sector can do more business and assume more risk. Two big boosts are expected for banking, both from the point of view of interest and income not linked to rates.. On the one hand, the next government phase is expected to result in more inflation, which would lead to higher interest rates and less easing by the Federal Reserve (Fed). Furthermore, deregulation could encourage the financial sector with more operations and investment.
“Financial entities and, especially banks, should benefit from a review [al alza] of the rate outlook and a deregulatory push that should lead to greater activity in the primary market,” summarizes Mathieu Racheter, head of equity research at Julius Baer.
An iShares ETF that replicates the price of US regional banks rose 11% in the run-up to the elections, in just one day, and, after the appointment, it appreciated 2% more.
The tax reduction and the impact on small listed companies
As a whole, the US stock market is also being one of the big winners. Since election day, November 5, $1.8 trillion has entered American equities, according to data from Bank of America (BofA). Whether this river of money continues to grow will depend, in part, on tax cuts. Trump has promised that he will reduce taxes and grant tax credits, since this burden “has spurred” economic growth, the program notes.
“Trump’s sweep in the election will support economic growth through an expansionary fiscal policy, with Congress’ approval to extend temporary tax cuts. We have revised upward our outlook for the Gross Domestic Product and for the inflation,” says David A. Meier, economist at Julius Baer. The Republican Party has promised that the reductions that were temporary in the previous stage will now be permanent.
If these measures are carried out, companies will be able to benefit from lower tax costs. In addition to the fact that Wall Street renewed historical highs in several sessions after the vote (although it corrected this week), the Russell 2000, the index of the least capitalized, hit three-year highs.
Tariffs: food for the rise of the dollar
How Trump is being a shock to the markets is something that is reflected in the dollar, which is at a 55-year high, taking into account the real exchange rate, according to BofA data. “The dollar is our currency and your problem,” the entity ironically talks about the strengthening of the currency, which is detrimental to the rest of the world outside the United States.
One of the assets of the Republican strategy are tariffs, something that benefits the dollar. “Trump needs the revenue from higher tariffs given that America is already in a very precarious fiscal position,” explains ING’s global head of macroeconomics, Carsten Brzeski. The expert clarifies that this measure will not materialize until the summer, since he believes that the president will address the trade war with China first. Republicans want to impose tariffs to make up for the trillion-dollar trade deficit in goods.
The counterpart is clearly in Europe and China. The Old Continent buys liquefied natural gas or military equipment from the United States and continuing with 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, again, on when Trump materializes the tariffs. What is clear is that Chinese companies doing business in the country will suffer. In general, this protectionism and willingness to prioritize America will weigh down the clients and sellers of the greatest power in the world. The impact of this tax on trade will depend on whether these economies are able to find other trading partners and substitute links.
Cryptocurrencies celebrate Trump’s support
Finally, cryptocurrencies are among the clear winners of the elections. Especially bitcoin. The past and future president has not skimped on oaths: he will create a strategic national reserve of bitcoin and turn the United States into the world capital of bitcoin. In this case, we have to see in detail which of those promises end up materializing. Only three focuses are included in the program: guaranteeing the right of Americans to mine cryptocurrencies, to operate with decentralized wallets and promote cryptocurrencies, this last point is generic.
In any case, the fact that the leader of the greatest power in the world embraces cryptocurrencies with such forcefulness is a true bullish argument. For now, experts hope that there will be more lax regulation towards digital assets, but perhaps the kind of government adoption that some expect with Trump is still very premature. The main ‘crypto’ has appreciated almost 33% since the Republican victory and has renewed historical highs on successive occasions, with a peak above $92,000.
What is left out of the ‘Trump Trade’? AI is key
At a time when equity valuations are relatively high, the stock market needs the support of some external element to justify the prices that are now being paid for listed companies. There are sectors, such as banking, that are confident in a decrease in regulation by the Trump administration that could end up increasing their profits above expectations, and in general, the stock market expects that corporate tax cuts will provide fuel for Let the bullish rally continue. However, there is another element, as important or more important than Trump’s electoral promises, that may be the catalyst for the rise in the stock market in the coming months: the development of artificial intelligence.
As Morgan Stanley explains, “investors are going to have to face high equity valuations,” they acknowledge. “Even with the Fed lowering rates, bond yields have risen in recent weeks as investors price in the risk of inflation and high debt in the US,” they note. For Morgan Stanley, “a real economic interest rate of 2% is associated with valuation multiples of 17 times in the US stock market. Now, this ratio is 23 times, which makes listed companies vulnerable,” they highlight. .
At these multiples, the stock market needs the boost from Trump’s tax reform, or from an external element such as artificial intelligence. For many analysts, this will be the main catalyst for corporate profits in the coming years, and it seems that investors are placing their trust in AI to justify the high valuations being paid in the US stock market. In fact, the consensus of analysts collected by Bloomberg expects increases of almost 10% for next year in the S&P 500, since they believe that the index will reach 6,450 points in 2025.
China’s stimuli
In the latest survey of fund managers released every month by Bank of America, there is one element that has stood out above the rest, as the factor that could help the markets the most next year and, surprisingly, it is not the tax cuts that Trump has promised. For most of the managers surveyed, China’s recovery is the most important element for markets to rise in 2025, above rate cuts, AI development, tax cuts, or geopolitical conflicts. they fix themselves AND China now depends largely on government stimulus, in an economy with a high degree of intervention.
In order to justify a new bullish push in the stock markets, even the American ones are tied in part to the performance of China, which continues to deal with a crisis that has already dragged on for several years. It is another of the factors that could move the market, apart from ‘Trump Trade’.
The monetary policy of the Federal Reserve
Outside Trump’s orbit of powers, there is a key element for the performance of the markets: the monetary policy of the Federal Reserve. In a certain sense, the Fed’s decisions on whether to lower or raise rates are related 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 (tariffs and immigration policy), although this increase in prices is not going to reach the maximum levels seen 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 usually supports stock markets, as financing conditions soften and companies have more room for maneuver. However, if rates do not fall as much as expected, this could put a brake on the rise of the major indices, or even generate a crash if it is assumed that companies will suffer.
This same Thursday, when Jerome Powell hinted that the Fed is going to take the process of lowering rates slowly, the market suffered it in the flesh, and the stock markets have ended the week with falls, in part, infected by expectations of less aggressive rate cuts in the coming months. The Fed is independent, and although attempts to interfere by Trump have arisen in the past, Powell will presumably want to maintain the course he considers most appropriate, and this will affect the movements of the S&P 500 in the coming months.
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