President Donald Trump has won the US Presidential election race and with S&P futures climbing higher, the dollar posting its biggest gain against major currencies since 2020 and Treasury bonds tumbling, the markets are sending a clear signal that investors expect a second Trump administration to mirror the first. This means tax cuts, trade tariffs and deregulation are back on the agenda – moves that could simultaneously catalyse economic growth, company earnings and inflation.
Daniel Casali, chief investment strategist at Evelyn Partners, the wealth manager, says: “The fact this election appears more of a landslide with less risk of a disputed result is positive for the markets. One of the biggest fears going into this election was a contested result and a repeat of the Capitol Hill riots of 2021. With a clear Trump victory, that concern has now eased.
“The positive market reaction is not just about a Trump victory but also the likelihood that Republicans are set to retain the House of Representatives and look likely to take the Senate and therefore control Congress. The combination of a clean sweep victory means tax cuts are likely over the coming year. That will be beneficial for equities as it means lower taxes will boost company earnings. So, the combination of a clear victory along with the impact of those tax cuts, will be beneficial for growth and the equity markets are reacting positively to that.
“Of course, much of what Trump said in the election campaign is rhetoric, designed to win over voters, so the question is what happens in reality. What we do know is that a Republican-led Trump administration stands for lower taxes, less regulation and more trade tariffs.
“The strengthening US Dollar is a result of markets already pricing in Trump’s proposal to increase trade tariffs. When trade tariffs went up in Trump One, the dollar appreciated. However, Trump could be using the threat of trade tariffs as a means to an end to get the Chinese to invest more in the US. This means the big surprise in the second Trump administration could be that he actually negotiates a trade deal with China by using this blunt instrument of threatening to raise tariffs. This could work out positively for equities though it is too early to tell for sure at this juncture. A second factor fuelling the stronger dollar is the impact of a Trump win on growth: if growth is expected to be stronger it might mean the Federal Reserve is less likely to cut interest rates as aggressively and may not be as dovish.
“Of course, Trump’s pledge to lower taxes, funded by tariffs on all imports, may be good for equity markets right now, but what his policies also entail is more debt. Tariffs have the potential to be inflationary, as they will probably add to consumer end-prices, which subsequently might impact consumer confidence and economic activity. While cutting Corporation Tax, for example, would be positive for US equities, it could also lead to higher government debt which may impact the bond markets on concerns over burgeoning debt. We don’t know at what point this debt might become unfinanceable but for the moment the equity markets like what they are seeing. While the bond market might not, bond yields aren’t yet moving significantly higher.”
