Why Wall Street is Cheering on Trump’s Return

By Euan Sinnott

The S&P 500, an index that tracks the performance of the largest 500 American public companies, last week recorded a fresh record high, climbing 4.66% for the week; the best weekly performance for the index in a year. The Russell 2000, which tracks smaller American public companies, rose an even greater 8.75%. Bitcoin also crossed the $80,000 mark for the first time ever, and the dollar also strengthened slightly. This strong performance is more impressive when you consider the election was widely seen to be a tossup, meaning at least some of the gains were already priced in. Markets believe that a Trump Presidency, with Republicans also controlling Congress, will mean lower taxes, less regulation and easier dealmaking. Markets also dislike uncertainty, and while it remains to be seen exactly what Trump will do in his second term, having the winner been clear on election night, and avoiding a messy and protracted post-election period in the event the vote was closer, was something well received by markets.

The Biden administration led an aggressive charge against corporate mergers, believing them to often harm consumers and competing firms. The FTC and DOJ under Biden sued to block mergers, amongst others, between Spirit and Frontier Airlines; Microsoft and Activision Blizzard; and Kroger and Albertson’s – two large supermarkets. This aggressive trustbusting was welcomed by progressives, and even some conservatives, but was met with disdain on Wall Street, who felt actions by the FTC and DOJ hurt American dynamism and added costs for companies. Some of the biggest winners from the surge in markets last week were investment banks, like Goldman Sachs and Morgan Stanley, who both rose over 10% last week, on the expectation of an M&A boom under Trump. The Trump administration is also thought to have abandoned the bid to break up Google, although the case was started during his first term, citing the need to compete with China. The biggest critics of the Biden administration’s approach to mergers were often found in Silicon Valley. And while many notable tech figures have shifted to the right, either outright becoming Trump supporters or moving away from the Democratic party, Trump has in the past been highly critical of ‘Big Tech’. So the approach to mergers within the tech industry is yet to be clear.

Beyond a change in approach to mergers, a second term of Trump is likely to mean lower corporate taxes, as well as more deregulation. In his first term, Trump cut the headline corporate tax rate to 21%, down from the 35% it had been previously. Harris had proposed to raise the rate to 28%, and Trump has mooted cutting it to 15%. Goldman Sachs has estimated that such a move would increase S&P profits by 4%. Trump has also promised to eliminate tax on tips, social security payments, overtime and even car interest payments. All of these moves should increase consumer spending if implemented. But, they will be expensive and potentially distortionary, so it is debatable whether these will actually clear Congress. Yields on 10-year treasuries were little changed, at around 4.45%. But in the short run, treasuries will likely move more in reaction to what the Fed, rather than what Trump does. But, if fresh tax cuts, as well as an extension of the 2017 tax cuts are not offset by spending cuts, markets may lose confidence in the US’ ability to pay back its debt. Deficits are currently running at 6% of GDP, a staggering figure considering the US is not in recession, or experiencing an economic shock. An expansionary fiscal policy also risks stoking inflation. The stimulus bill Biden signed after entering office is estimated by economists to account for about a third of the inflation surge in 2021-22, so there are risks to running high deficits.

In terms of changes to taxes, Trump has also notably proposed a blanket 20% tariff on all imported goods, as well as a 60% tariff on Chinese goods. He has even proposed eliminating income tax and replacing it with tariffs, although this is very unlikely to occur. Such a move would lead to price increases for consumers, and would hurt US firms that rely on imports, or global companies that ship their goods to America. But, while many firms would be badly hit by a 20% or 60% tariff, markets did not appear to worry much about this threat. Shares in firms like Nike and Apple, that are reliant on manufacturing their goods in Asia, were little changed. This likely reflects a scepticism that Trump’s tariff plans will actually be implemented. During his first run for the White House, the President-elect often chastised America’s trading relationship with China, as well as free trade deals such as Nafta, which was between the US, Canada and Mexico. But while Trump promised to majorly renegotiate the deal, seeing it as being unfair to the American workers, particularly in the Midwest; the US-Mexico-Canada Agreement that replaced Nafta was little different to the deal it superseded. A blanket 20% would be very inflationary, and likely politically unpopular if introduced. Considering how badly the 2021-22 inflation surge hit Kamala Harris during the election, many assume Trump is bluffing to get a better deal from other countries. This may be true, but even a half-implemented or temporarily implemented broad-based tariff could significantly harm many firms. Markets are likely too optimistic about the risks Trump poses to global trade. One must also consider that the President does not need the approval of Congress to raise tariffs.

Overall, Wall Street is on balance right to welcome Trump’s return. The stock market performed well during his first term, rising 70% to record highs, despite the pandemic. Lower taxes, more M&A and less regulations should boost corporate profits and help the market grow further. But there are still significant risks to a second Trump term, namely increased tariffs and uncertain and sometimes erratic policymaking.