Donald Trump’s return to the White House will likely have several immediate and longer-term impacts on financial markets, driven by his expected policies on taxation, regulation, and international trade.
Markets are showing a marked increase in volatility in the immediate aftermath of the election result, as uncertainty often accompanies a change in US leadership, particularly in a contest as polarising as this one has been. However, Trump’s previous tenure as president was generally seen as pro-business, which, over the longer-term tends to provide a tailwind for equities. Sectors such as energy, manufacturing, and defence may be amongst the biggest beneficiaries due to Trump’s economic policies.
Trump has advocated for lower taxes on corporations and high-net-worth individuals. If such cuts materialise, corporate profits may see a boost, which would result in higher share prices, particularly benefiting sectors such as technology and banks. Whilst lower taxes may stimulate spending and investment, they could also add to the national debt, affecting long-term economic stability. Moreover, increased stimulus in the form of tax cuts would likely aggravate inflation, with a meaningful rise most probably forcing the Federal Reserve to pivot back to rate hikes. This could constrain equity growth in the medium-term, particularly small- and mid-cap stocks, which tend to be more debt laden than larger caps.
Trump’s approach to deregulation in his first term significantly impacted the energy, financials, and healthcare sectors. Repealing environmental regulations to promote fossil fuel production and reduce costs for companies, as part of his energy security policies, will improve the business environment for energy companies, potentially enabling increased production and job creation. As was the case previously, this could have a mixed impact on the share prices of energy companies, as a marked increased in supply would create downward pressure on the price of oil, and therefore revenues. Other factors, such as economic growth and OPEC+ policies, are also at play in commodities markets, making it difficult to predict how stocks in this sector will perform.
Easing of regulations in the financial sector, for example raising the asset threshold for banks subject to stricter oversight and easing the Volker Rule (which restricted proprietary trading), would also create a positive backdrop for companies. Similarly, healthcare reforms such as reducing hurdles around drug pricing and the Affordable Care Act are seen as bullish for the sector.
It is however important to note that whilst these policies can create a fertile environment for equities, they do come with risks. Trump’s stance on energy raises environmental concerns as well as jeopardises the future of clean energy. Deregulation of the financial sector can lead to increased systemic risk, something that regulators have worked hard to reduce since the Financial Crisis. Additionally, a move away from governmental oversight in the healthcare industry could take away access to healthcare from more people who need it, further deepening societal problems around healthcare that the country faces.
Trump’s focus on “America First” trade policies may mean renewed tariffs and trade tensions, especially with China. While this might benefit US industries like manufacturing and agriculture in the short-term, prolonged trade conflicts could disrupt global supply chains and increase production costs, impacting companies reliant on global sourcing. This would likely mean that the large multinationals become more disrupted, whilst small- and mid-cap companies would likely benefit as other businesses and consumers look to the domestic market.
Over the longer-term, tariffs tend to put upward pressure on prices as the lack of global trade means fewer options for businesses and consumers, who are forced to look to the domestic market, in turn driving up prices. Rising inflation would need to be met with interest rate increases in order to control it. However, increasing rates is at odds with Trump’s view on economic policy, with the former president previously pressurising the Federal Reserve to keep rates low to make for a more hospitable business environment. His win could rekindle market expectations of similar pressure, affecting inflation dynamics and likely leading to a marked rise in bond yields as investors price in higher prices.
Overall, a Trump win could bring a mix of short-term optimism in equity markets but with underlying risks that could cause market volatility over the longer-term.