In the annals of American political economy, few figures have catalyzed such pronounced optimism as Donald Trump. His initial presidency, dubbed Trump 1.0, was characterized by a robust playbook: tax cuts, domestic energy production, and a reliance on tariffs and sanctions abroad. The moment Trump was elected in November 2016, a remarkable surge in small business expectations and consumer confidence ensued, a sentiment that persisted until the pandemic’s onset. However, after two years of recessionary sentiment leading up to the November elections, Trump 2.0 has emerged, igniting an even more fervent euphoria across the business landscape.
Trump 2.0 promises a return to familiar strategies—tariffs abroad and tax cuts at home. The corporate incentive landscape resembles Santa’s sleigh, filled to the brim with goodies for business. The plan includes eliminating taxes on tips, Social Security, and overtime wages, while extending the substantial 2017 tax cuts that Democrats vowed to dismantle. Corporate taxes are set to plummet to a mere 15%, and companies investing a billion dollars in the U.S. will find themselves navigating fewer regulatory hurdles with newfound ease. The ambitious energy infrastructure initiatives that languished under Biden are poised for a renaissance, positioning American petroleum production to meet the energy needs of our allies.
Adding to this optimism is the newly minted Department of Government Efficiency (DOGE), where figures like Elon Musk aim to eradicate waste and foster deregulation. While the hype surrounding deregulation may be excessive, any tangible progress in unshackling businesses from the burdens of overregulation will undoubtedly resonate with small business owners and investors alike.
This week, Trump had the honor of ringing the opening bell at the New York Stock Exchange—an event that has not occurred for a sitting president in nearly 40 years, despite the invitation extended to all. The presence of business titans from across the political spectrum at this historic event underscores the extraordinary expectations surrounding Trump’s return to power. As is often the case, however, the hype surrounding political transitions seldom aligns with the reality that follows. Investors are reminded of the adage: “buy the rumor, sell the news.” During this golden period of speculation preceding Trump’s inauguration, we observe significant capital inflows into stocks and Bitcoin, raising the question: can the lofty expectations materialize into substantive policy once Trump assumes office?
The political landscape is fraught with obstacles, yet the business community, alongside political leaders and the substantial $7 trillion sitting in money market funds, appears poised to support this new era of hope and change.
Our confidence in the ongoing business cycle expansion and a bullish stock market through 2025 remains resolute. However, stretched valuations may lead to a notable correction in the first quarter following Trump’s January 20th inauguration (TBD). Rapid growth expectations often lead to market stalls until the reality of current earnings catches up. Our ExecSpec Indicator Composite has entered overbought territory, signaling that the market may soon face short-term challenges.
Nonetheless, the $7 trillion in reserve capital remains a potent force, waiting for favorable conditions and lower Bond yields in order to be deployed into equities. The primary threat to bullish sentiment lies in rising inflation. In the near term, inflation and interest rates are expected to remain stable or trend slightly upward, but not enough to incite panic in the stock market beyond typical corrections of 5 to 11%.
While Trump 2.0 casts a long shadow over healthcare and clean energy initiatives, it shines brightly on sectors like cryptocurrency, cybersecurity, and banking, with small-cap stocks and energy infrastructure also likely to benefit next year. Although Bitcoin has never been a favored asset in our analysis due to its lack of intrinsic value, we noted its impending accumulation phase prior to the election. Cryptocurrency has now cemented the seal of approval from the U.S. government and the broader business community, where increased demand from the Treasury and various sovereign wealth funds positions Bitcoin as an evolving strategic asset akin to gold. With sovereign wealth funds and corporations moving into bitcoin, the light has turned green for the broader public to test the waters. Demand is sticky in these early innnings as many buyers are looking to build longer term reserve holdings to show on their public financial statements.
Our thesis anticipates limited downside for the stock market until later in the first quarter of 2025, post-inauguration. Nevertheless, signs of froth have already led to a slight 2 to 3% decline in non-mega cap stocks. While overly optimistic sentiment indicators may stall the market temporarily, the substantial liquidity in a predominantly positive environment suggests that investors are unlikely to allow significant declines until after January 20th. In this pre-inaugural phase, Trump can make ambitious promises without immediate accountability, and the market seems ready to ride this wave of optimism into the new administration.
