U.S. stocks have looked sluggish at times in recent weeks as rising rates and debate over whether the Federal Reserve will cut interest rates in 2025 have sent the S&P 500 (^GSPC) to its knees. lowest levels since the elections.
But a better-than-expected inflation reading on Wednesday helped U.S. markets rally, and Bank of America investment strategist Michael Hartnett believes further declines in the S&P 500 will be “protected” by President-elect Donald Trump in the coming months.
During his first presidential term, Trump viewed the stock market as a barometer of his own administration’s success. Many investors expect Trump to remain susceptible to a decline in U.S. stocks during his next term.
And while the tariffs are a concern for investors and businesses, other Trump policies could be positive for the stock market.
Deregulation has been seen as a boon for banks and could encourage more deals after a difficult few years. A more crypto-friendly administration has caused this pocket of the market to skyrocket, and lower corporate tax rates could help corporate profits across all sectors. Trump’s mantra of “America First” has also spurred optimism among small businesses and could also be seen as a tailwind for small-cap companies.
Hartnett cautioned, however, that other factors such as the high market valuation and concentration seen in the index — with only 10 stocks representing almost 40% of the index – probably also capped the rise of the S&P 500.
And the question remains whether rallies in certain “Trump deals” like small caps, energy stocks and financial stocks will sustain after taking off after the election to retrace most of their gains before the inauguration.
Hartnett added that if Trump 2.0 and a rate cut fail to send the Russell 2000 small-cap index (^RUT) sustainably above its 2021 high, asset allocators will likely reduce their overweighting by actions.
Overall, strategists agree that Trump’s policies could still be positive for the U.S. stock market, but do not believe those gains will occur in a linear fashion.
“January’s volatility ahead of Trump’s inauguration on January 20 reinforces the central idea of a more volatile year ahead,” wrote Julian Emanuel, who leads the equity, derivatives and quantitative strategy team at Evercore ISI, in a note to clients Thursday evening.
Emanuel, who sees the S&P 500 index ending 2025 at 6,800, about 13% higher than current levels, continues to argue that the Trump administration will result in a continued alternation between sentiment of “risk aversion » and that of “risk aversion” among investors.
