4 key watchpoints for investors in a second Trump presidency

Executive summary:

• Republicans won the White House and the Senate, with control of the House of Representatives also possible
• U.S. equity markets have soared on expectations for corporate tax cuts
• The Bank of England and the U.S. Federal Reserve both slashed rates by 25 bps

On the latest edition of Market Week in Review, Chief Investment Strategist for North America, Paul Eitelman, discussed key watchpoints for investors in the wake of the U.S. elections. He also explained how the election results are impacting markets, and finished with an update on the latest monetary policy decisions from the U.S. Federal Reserve (Fed) and the Bank of England (BoE).

What should investors pay attention to in a second Trump administration?

Eitelman began with an update on the results from the U.S. elections on Nov. 5. He said that while some votes are still being counted, a wave election outcome—where one political party controls the presidency and both chambers of Congress—appears increasingly possible for the Republican Party. Eitelman noted that the race for the White House was called for former President Donald Trump early on Nov. 6, with the Republican Party securing control of the Senate the same day. Although control of the House of Representatives has yet to be decided, he said the latest voting trends suggest that the Republican Party could maintain its majority.

“The potential for a unified Republican government in the U.S., beginning in early 2025, has been a major story for investors this week, as wave elections tend to be more consequential for asset markets,” Eitelman remarked. He explained that these types of outcomes give political parties the ability to develop and pass new policies into law that can reshape fundamentals for the corporate sector.

Amid this backdrop, Eitelman said he sees four key areas for investors to focus on in a second Trump administration, with the first centering around tariffs and trade policy. “There’s an expectation that tariff rates will very likely go up under the new administration—particularly on imports from China, but also potentially on imports from other key U.S. trading partners, including European countries and Mexico,” he stated.

The second area for investors to pay attention to is U.S. immigration policy, Eitelman said. “There’s an expectation that immigration flows into the U.S. are likely to be somewhat limited under the Trump administration—and this would have important implications for demographics as well as the state of the U.S. labor market,” he said. Eitelman added that the strength of the country’s jobs market has been an important watchpoint over the past few years amid the Fed’s quest to tame inflation.

The third watchpoint is U.S. fiscal policy, Eitelman said, noting that most investors anticipate fiscal policy to remain in an expansionary mode for the next few years. “At Russell Investments, we share this viewpoint and expect that increased government spending will continue to put pressure on deficits and the national debt going forward,” he stated.

Eitelman said it appears that some of the household tax cuts within the 2017 Tax Cuts and Jobs Act—passed under the first Trump administration—will very likely be extended beyond 2025. The incoming administration has also floated the idea of cutting taxes in the corporate sector as well, he noted. “By our estimation, these tax cuts could potentially boost U.S. earnings growth by around five percentage points on an annualized basis,” Eitelman remarked.

The fourth and final investor watchpoint is deregulation, Eitelman said, with a particular emphasis on how efforts in this space could impact sectors like financials and energy moving forward.

Overall, the economic impacts of a potentially unified government will probably boil down to the degree of emphasis the Trump administration and Republican leaders place on these four initiatives heading into 2025 and beyond, Eitelman said. “I wouldn’t be surprised if ultimately, these four areas of focus prove to be supportive for U.S. economic growth over the medium term,” he stated. Eitelman added that from an inflation perspective, he anticipates policy moves in these areas to put a little more incremental pressure on inflation risks moving forward.

Equities soar, bonds sell off in wake of U.S. elections

Shifting to the market’s reaction to the election results, Eitelman said there were some notable moves in financial markets the past few days—particularly on Election Night, when it became apparent that Trump was likely to recapture the presidency. “In many ways, what happened in markets on Nov. 5 looked like a copy-and-paste from Election Night in 2016, with a reflation trade playing out across markets,” he remarked. Long-dated U.S. Treasury yields also rose sharply on Nov. 5, Eitelman said, explaining that this was likely reflective of some concerns around deficit and inflation risks.

Eitelman noted that the trade-weighted U.S. dollar also appreciated significantly in the wake of the elections—particularly against currencies like the euro and the Mexican peso, due to potential changes in trade policy under the incoming administration.

Meanwhile, equity markets have continued to soar in a post-election rally, he said, with the benchmark S&P 500 Index closing at a record high of 5,973 on Nov. 7 while the Russell 2000 Index of small cap stocks vaulted nearly 6% on Nov. 6 alone.

“Investors are expecting potential corporate tax cuts to really benefit corporate fundamentals moving forward,” Eitelman said. In the small cap space in particular, the combination of an expected increase in M&A (mergers and acquisitions) activity, deregulation, and strong nominal growth are viewed as tailwinds, he added.

BoE and Fed slash rates

Eitelman finished with a look at the latest policy announcements from key central banks. He said that the BoE and the Fed each lowered borrowing costs by 25 basis points (bps) at their Nov. 7 meetings, marking the second rate cut of the year for both.

Chair Jerome Powell’s remarks at the ensuing Fed press conference were in alignment with Russell Investments’ view on the state of the nation’s economy, Eitelman added. “When we look at the U.S. economy today, we see a picture of resilient economic growth and moderating inflation over time,” he stated. Such an environment is conducive for the Fed to continue gradually lowering interest rates from a restrictive to a more normalized level, Eitelman noted.

“With this in mind, we continue to expect the Fed to cut rates at quarter-point increments through the middle of next year,” he concluded.