Hope Springs Eternal

The market hates uncertainty” is a common saying on Wall Street. Whether you voted for Harris or Trump, the conclusion of the 2024 election was welcome news for the US stock market. Despite some expectations for a contentious transfer of power, the recent election was convincing, and Democrats gracefully conceded. Fair elections and the peaceful transfer of power underpin the value of our currency and the US market. November’s election was not only good for our republic but also a positive catalyst for US equities.

US indices moved euphorically higher with the Trump victory, and certain sectors (namely financials and energy) were notable beneficiaries. As animal spirits subsided, however, market participants sobered. Concerns around inflation and the Federal Reserve’s path forward resurfaced, and equities gave back some of their gains. More recently, investors are focused on how one or more Trump policies might impact the US economy.

Trump espoused numerous business and economic proposals on the campaign trail. Three of these - that pundits are currently debating are tariffs, corporate tax cuts, and more restrictive immigration. Albeit artful in his framing, the exact construct and impact of Trump’s proposals is largely unknown. Corporate tax cuts and tariffs may be positive for domestic industry, but these policies could also be inflationary (leading to a more hawkish Federal Reserve). Similarly, more restrictive immigration may make the country more secure but also increase labor costs. Until we have more details, how one or more Trump policies will impact our economy is anyone’s guess. In the meantime, I suggest investors take a patient view and stay centered on more fundamental market drivers.

The US consumer is healthy, corporate profits have been strong, inflation seems to be generally under control (for the moment), and most forecasters expect profits to keep growing in 2025. All of these are material and favorable for the US stock market. Moreover, there is no question that Trump is a pro-business president. As such, I expect Trump’s policies to be generally positive for US companies and I continue to be constructive on the US equity market. That said, I would be careful with certain areas of the market – namely larger US tech stocks.

At 20+x forward earnings, the S&P 500 (which is highly concentrated in US tech) is arguably overvalued. In fact, some forecasters are suggesting that S&P returns from this starting point could be remarkably close to zero. As such, I would consider increasing US small-cap allocations.  I would also consider increasing ex-US equity allocations.  Both of these market segments offer more attractive valuations. Finally, I would consider increasing cash positions and/or short-duration fixed-income allocations. Notorious for posturing, gaffes and international drama, cash and short-term treasuries might help moderate what could be a more volatile administration.

Despite current valuations, I remain optimistic about the United States and the potential for another healthy market return in 2025. While broader market indexes (like the S&P 500) can be a useful investment tool (especially for macro-oriented trends), it may be a good time to reflect on (1) how much some sectors and stocks have appreciated these last several years and (2) where some of these profits might be thoughtfully harvested and reallocated.