Well, the election results are in. It seems that, come January, Donald J. Trump will be sworn in as the 47th president of the United States. And thanks to a sweeping ‘red wave,’ he will also receive ample support from a Republican House and Senate to execute his economic plans during the first two years of his term.
Of course, that has major implications for both the U.S. economy and the stock market.
Today, stocks are celebrating this news. The market is rallying more than 2% across the board, paced by huge gains in tech and financial stocks, especially small caps. Cryptos are joining the party, too, with Bitcoin (BTC/USD) now surging to all-time highs.
But despite today’s red-hot rally, investors and voters alike now face many unanswered questions. Will this party last – and if so, for how much longer? What about the future of oil prices, inflation, and interest rates? Which stocks should benefit most under Trump, and which will get hit hardest?
We’ve spent the last several hours dissecting these questions and parsing years of market data in search of answers. And that research has helped us to compile a list of 10 major market implications now that Trump is set to be our next president.
So, without further ado, let’s dive right in to see how we should prepare for Donald Trump’s second term in office.
1: Stocks Will Go Higher
With Republican control of both the House and the Senate, Trump should be able to extend and make permanent the 2017 Tax Cuts and Jobs Act. Those tax cuts should stimulate economic confidence and power more consumer spending and economic investment – the sum of which will drive corporate earnings higher in 2025 and ‘26. Additionally, Trump should be able to reduce the corporate tax rate from 21% to 15%, which Goldman Sachs estimates will boost EPS by ~4%. All up, we expect earnings should rise about 15% per year into 2026, creating a very compelling runway for further stock price gains regardless of valuations. Not to mention, during Trump’s first term (pre-COVID), the S&P 500 rose ~40% from January 2017 to December 2019. We think a repeat is possible.
2: Oil Should Stay Flat, But Inflation Will Be a ‘Wild Card’
We believe that oil prices will likely flatline over the next 12 to 24 months, with growth in U.S. economic activity balanced by headwinds related to increased domestic oil production. If prices hold around $70, inflation should remain between 2% to 3%. However, stronger U.S. growth in 2025-26 could present upside risks to inflation; though past trends under Trump in 2017-19 showed relatively stable inflation. As such, we view inflation as a ‘wildcard’ risk.
3: Interest Rates Are Also a ‘Wild Card’
The path forward for interest rates and Treasury yields seems uncertain, as it will hinge largely upon inflation levels over the next few quarters (which, as stated above, is uncertain). If Trump’s pro-economic and protectionist policies do create more inflation, which seems likely, then interest rates will not decline as much as the market expects. The market is currently pricing in four rate cuts into the end of 2025 (roughly unchanged from pre-election estimates). If inflation does reheat over the next few months, we will likely only get two or three cuts, and Treasury yields will rise. If not, four-plus cuts remain on the table, and Treasury yields should fall. We will have to wait for more data from the early months of Trump’s next term before we make a call on the path forward for interest rates.
4: Big Upside in Stocks Will Hinge on Inflation, Interest Rates, and Valuation
While we think stocks have good upside prospects over the next 12 to 24 months, spectacular upside potential will depend on the path forward for inflation and interest rates. If inflation stays low and interest rates keep declining, then valuation multiples on the S&P 500 will expand, powering strong upside in stocks. However, if inflation rises and interest rates stay high, valuation multiples on the S&P 500 will compress, limiting upside in stocks. Currently, stocks are trading at ~20X forward earnings, adjusted for Trump tax cuts in 2025 (assuming the 4% boost estimate from Goldman Sachs). That implies a 5% forward earnings yield, which is still above the 10-year Treasury yield’s 4.45%. If Treasury yields stay at or below 4.5%, stock multiples can expand and drive additional upside in stocks (beyond earnings growth). But if yields climb toward and potentially even above 5%, multiple compression will limit gains.
This economic dynamic is arguably the most important of Trump’s presidency. And as of now, it’s unclear how it will play out. If inflation stays low and interest rates keep falling, stocks could rally more than 30% over the next two years. But if inflation reheats and interest rates stay high, stocks may only push marginally higher. It will become clearer in early-to-mid 2025 how Trump policies will impact the path of inflation. Until then, we don’t think anyone should be making a bold call here. Rather, we should continue assessing the monthly inflation data as it comes in.
5: Large-Cap Stocks Will Continue to Outperform
While small caps have outperformed in the day after Trump’s latest victory, history suggests that his tax cuts, tariffs, deregulation, and other economic policies are actually better for large caps. From 2017 to 2019, the S&P 500 large-cap index rallied about 43%, while the S&P 600 small-cap index rallied just 20%. In other words, the last time Trump was president, large-cap stocks outperformed small caps by more than 2:1 (pre-COVID). Therefore, we think that large caps – which have led the market rally since late-2022 – will continue to lead while small caps will likely continue to lag.
6: Growth Stocks Will Remain the Winners
Trump’s policies should stimulate economic growth, which means they should be good for growth stocks. In practice, this has been true. From 2017 to 2019, the S&P 500 Growth index rallied 58%, while the S&P 500 Value index rose just 27%. Similarly, the Russell 2000 Growth index rose almost 40%, while the Russell 2000 Value index rose less than 10%. In other words, across all market-cap spectrums, growth stocks outperformed value stocks during Trump’s last term (pre-COVID). And large-cap growth stocks outperformed small-cap growth stocks. We think a repeat of this performance is possible. Therefore, we see growth stocks continuing to outperform value stocks over the coming years.
7: ‘New-School’ Growth Stocks Should Be the Biggest Winners
While growth stocks have performed exceedingly well in this AI Bull Market, so-called ‘new school’ growth stocks – those of smaller, disruptive tech startups – have lagged. The best benchmark for these ‘new schoolers’ is Cathie Wood’s ARKInnovationETF (ARKK). Over the past two years, it has lagged the large-cap Nasdaq 100 index. But in the early innings of Trump’s first term, it was one of the biggest winners, with ARKK rising almost 150% from 2017 to 2019. This is likely because Trump’s economic policies were pro-innovation and pro-startup. We think a repeat is possible. And considering J.D. Vance’s connections to Silicon Valley and the startup tech world, the gains could come with even more momentum this time. That’s why we think those ‘new-school’ tech stocks will be huge winners over the next few years.
8: Clean Tech Stocks Will Crash; But Nuclear Stocks Could Surge
While the stock market surged higher today, not all stocks joined the party. Clean tech stocks, for example, broadly crashed, led by double-digit declines across many solar, wind, hydrogen, EV, and energy storage stocks. That is because Trump will likely eliminate green-energy tax credits in the Inflation Reduction Act and push for a shift away from the deployment of clean energy across the U.S. We think solar, wind, hydrogen, EV, and energy storage stocks will struggle under a Trump presidency. However, nuclear energy stocks are rallying today, likely because Republicans have broadly adopted a pro-nuclear stance. We can see nuclear becoming the “go-to” clean energy source under a Trump presidency and believe that nuclear energy stocks will perform very strongly over the next few years.
9: Financial Stocks Should Be Outperformers
As deregulation and stronger economic growth unlocked enhanced profit growth for financial firms, financial stocks were huge winners during Trump’s first term. We think the next few years should be a repeat of that. With Republican control of both the House and Senate, Trump will likely continue to deregulate the financial industry, leading to strong profit growth for banks, lenders, and other related firms. The market seems to think that credit service companies like Discover Financial Services (DFS) and Synchrony Financial (SYF) will be huge winners; they were two of the best-performing stocks today. We see that bull thesis and largely agree with it.
10: Real Estate Stocks Could Struggle
Like that of clean energy, real estate stocks largely failed to join today’s market rally, likely because of the interest rate ‘wildcard’ risk cited above. A Trump presidency could mean higher interest and mortgage rates. And if that’s the case, the housing market – which has been frozen by high rates for the past two years – will likely remain frozen, regardless of how well the economy performs. As such, we think that real estate stocks have considerable risk exposure to a Trump presidency. Though, if early data suggests Trump’s policies are not creating more inflation, that risk could be eliminated. We will wait and see.
The Final Word on Preparing Your Trump Trade
Overall, we think Donald Trump’s latest victory offers both market opportunities and risks.
While the opportunities are very clear (upside impact on EPS), the risks remain obscure (downside impact on valuations through higher rates). So long as that remains the case, stocks will likely march higher.
That’s why we think stocks are set to soar over the short term.
Additionally, we think that if 2025’s data shows that inflation is not accelerating, the downside risks here could be eliminated. If so, then the stage will be set for continued stock market strength for the foreseeable future.
And… if we do get a strong bull market in 2025/26… it will likely be led by large-cap growth stocks – especially in the tech, financial, and consumer industries.
The investment implication?
Focus on growth stocks in the tech, financial, and consumer sectors. And consider adding some exposure to disruptive ‘new-school’ tech stocks.
For now, that investment game plan should be a strong one.
Check out what we’re doing right now to prepare for Trump’s second term in office.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
P.S. You can stay up to speed with Luke’s latest market analysis by reading our Daily Notes! Check out the latest issue on your Innovation Investor or Early Stage Investor subscriber site.