U.S. stocks have looked sluggish at times in recent weeks due to rising rates and debate over whether the Federal Reserve will cut interest rates in 2025 sent the S&P 500 (^GSPC) at its lowest level since the elections.
But a better-than-expected inflation reading on Wednesday helped U.S. markets rally, and Bank of America investment strategist Michael Hartnett believes further declines in the S&P 500 will be “protected” by President-elect Donald Trump in the coming months.
During his first term as president, Trump viewed the stock market as a barometer of the success of one’s own administration. Many investors expect Trump to remain susceptible to a decline in U.S. stocks during his next term.
And while tariffs are a concern for investors and businesses, other Trump policies could be positive for the stock market.
Deregulation was seen as a boon for banks and could encourage more deals after a few difficult years. A plus crypto-friendly administration has sent this pocket of the market soaring, and lower corporate tax rates could help corporate profits across all sectors. Trump’sThe America First mantra also has boosted small business optimismand could also be seen as a tailwind for small-cap companies.
Hartnett cautioned, however, that other factors such as the high market valuation and concentration seen in the index — with only 10 stocks representing almost 40% of the index – probably also capped the rise of the S&P 500.
And the question remains whether the rebounds in certain “Trump trades” like small caps, energy stocks and financial stocks will persist after the post-election takeoff. only to trace most of their winnings before the inauguration.
Hartnett added that if Trump 2.0 and a rate cut cannot send the small-cap Russell 2000 (^RUT) sustainably above its 2021 high, asset allocators should reduce their overweighting in equities.
Broadly speaking, strategists agree that Trump’s policies could still be a favorable wind for the American stock marketbut don’t think these gains will happen in a straight line.
“January’s volatility ahead of Trump’s inauguration on January 20 reinforces the central idea of a more volatile year ahead,” wrote Julian Emanuel, who leads the equity, derivatives and quantitative strategy team at Evercore ISI, in a note to clients Thursday evening.
Emanuel, who estimates that the S&P 500 will end 2025 at 6,800, about 13% higher than current levels, continues to argue that the Trump administration will result in a continued alternation between sentiment of “aversion to risk” and that of “risk aversion” among investors.
