The sectors the pros are watching after US election

Stock markets loved the US election result. Bond markets not so much. President Trump’s unexpectedly decisive victory saw the S&P 500 Index of leading American stocks surge to an all-time high on 6 November. But US bond yields also rose unusually sharply as prices fell.

Such reactions reflect the contradictions of the Trump Presidency to come. Investors were happy to see an early end to the political uncertainties of what was expected to be a much closer battle for the White House. But more questions lie ahead.

• Invest with ii: Buy US Stocks from UK | Most-traded US Stocks | Cashback Offers

President Trump has promised an end to high inflation and pledged greater fiscal discipline – the latter potentially with the help of Elon Musk cracking down on state spending. But he is also committed to tax cuts, import tariffs and reduced immigration, all of which threaten to stoke inflationary pressure and drive-up government borrowing.

Inflation risk

“Strength in US markets is predicated on the expectation that Trump will lower corporate taxes, increase tariffs, be less fiscally responsible and pursue less of a green agenda, all of which is, at first glance, in favour of domestically-focused US companies,” says Ben Conway, chief investment officer of Hawksmoor Fund Managers.

“[But] some economic commentators predict higher inflation, which might result in fewer cuts in interest rates from the Federal Reserve, and lower longer-term US economic growth as a result of tighter immigration and supply-impairing tariffs.

“Indeed, some others point to the risks of investors losing confidence in the ability of the US economy to sustain a weak fiscal position under a Trump presidency.”

How will that play out in practice? Much depends on the extent to which President Trump translates his protectionist and populist campaign rhetoric into real-world policies. That will partly be determined by his own choices, but also by whether the Republican Party secures control of the US House of Representatives – still to be decided – in addition to its victories in the Senate and the White House itself.

Kevin Gardiner, global investment strategist at Rothschild & Co, says: “Trump plans to raise tariffs [on goods imported into the US], and to higher levels than in his first term, which is bad for the global economy and business; exactly how bad will depend on other countries' retaliation.  

“He is also planning to cut US corporate taxes, which is good for the global economy and business; exactly how good will depend on what he is able to implement, and on whether his advisers pay more attention to the 6%-7% federal budget deficit than he seems to.”

• Fund managers explain what Trump victory means for US markets
• Harris or Trump: funds to play the US election result

Tax cuts to drive consumer spending

During President Trump’s first term, the impact of tax cuts proved more consequential than the effect of tariff increases, Gardiner adds. One of President Trump’s first moves will likely be to make those tax cuts permanent, but he is also keen to go further, with additional reductions to individual, corporate and capital gains tax rates.

That has the potential to drive consumer spending – as well as corporate investment – but critics point to a warning from the Congressional Budget Office suggesting US national debt could increase by $7.75 trillion under President Trump’s plans. Getting Congressional approval for the full package may not be straightforward.

On tariffs, meanwhile, President Trump’s campaign proposed a universal tariff of 10% on all goods imported into the US, rising to as high as 60% on imports from countries that he perceives as running their own protectionist agendas – notably China.

“Trump’s rhetoric on tariffs is serious, but also a negotiating tactic,” says Simon Webber, head of global equities at Schroders. He adds: “We will have to carefully evaluate the actual implementation of tariffs: if sizeable blanket tariffs are applied to all imports or to all China imports, then inflation will almost certainly rise, and consumer spending will be impacted.”

• Why concentration risk is a problem for many investors
• Investors ditched funds ahead of capital gains tax changes 

At a macro level, in other words, the Trump administration’s performance will be measured by the extent to which its expansionary impacts are undermined by the likely inflationary consequences. The US Federal Reserve will also have to consider that question, with some economists now predicting US interest rates will remain higher for longer.

Against that backdrop, Goldman Sachs’ reaction to the election result has been to maintain its predictions for US stock market performance over the next 12 months – it forecasts a 9% rise in the S&P 500 – but with a different mix of sectors contributing to that headline performance.

Reasons to be positive….for now

In the short term, says David Kostin, Goldman Sachs’ chief US equity strategist, there are reasons to be positive. “Robust earnings growth should drive continued equity market appreciation into next year,” he argues.

Further out, market performance will take greater direction from the new administration, he says.

On tariffs, for example, while President Trump’s motivation is to benefit US companies, there is no shortage of industries where US businesses will need to continue sourcing from abroad, or even to manufacture overseas. Defensive sectors such as consumer staples, healthcare and utilities may be insulated from that risk; smaller companies, by their nature more domesticated, may also prosper. However, in other industries, US companies will face higher costs due to tariffs.

Deregulation under President Trump could also have an impact in multiple sectors.

Most obviously, the new President’s rhetoric on fossil fuels – including his famous “drill, baby, drill” remarks – suggests he will offer greater support for the oil and gas sector. That include, for example, lifting the Biden administration’s current hold on approvals for new natural gas permits.

Helpfully from President Trump’s perspective, boosting oil and gas supplies could also depress prices, countering some of the inflationary impacts of other measures.

Other sectors to watch

Elsewhere, there is good reason to expect a reduced regulatory burden on the financial services sector, which could encourage a pick-up in M&A activity in areas such as banking.

President Trump’s closeness to technology sector leaders could also see loosening of regulation around cryptocurrency, where federal authorities have become increasingly interventionist over the past three years. There are even suggestions President Trump may fire Gary Gensler, chair of the Securities and Exchange Commission.

“Structural investment themes in some cases could thrive in a new Trump era where innovation is likely to be underpinned by looser regulation to maintain US technological leadership,” adds Schroders’ Webber.

“We also think anti-trust regulation under Trump is likely to see a return to a more laissez-faire competition policy,” Webber adds, though he points out that Vice-President JD Vance’s concerns about big tech and social media platform companies may drive a different approach in this area.

On the flip side, the outlook is less rosy for clean energy businesses, which have benefited from extensive tax credits under President Biden – though Republicans have supported these initiatives too.

Support for the electric vehicle industry may also be reined in, although the automotive sector is influential, particularly in several of the swing states that helped President Trump secure victory.

“Business investment in the US value chain around key climate technologies is likely to be set back, with focus turning to the rest of the world where the energy transition will continue to gain pace,” adds Webber.

Not everything will change. “Some areas are likely to see bipartisan support,” predicts Monica Guerra, head of policy at Morgan Stanley Wealth Management. “For instance, policies supporting the development and reshoring of the semiconductor industry, as well as broader national security concerns such as defence spending and cybersecurity, are expected to remain robust.”

Nor will the outcome of the election put an end to all uncertainty – in particular about the impact of the Trump Presidency on geopolitics, where the consequences could be more dramatic than from economic policy.

“Many predict that Trump in the White House will embolden other autocrats, increasing geopolitical risk,” points out Hawksmoor’s Ben Conway. “Does this increase the probability of China invading Taiwan? Does this spell the end of an independent Ukraine? What are the consequences for Moldova and Georgia and others?”

Those are tough questions to answer, but the potential ramifications of crises in these areas are huge. For now, “risk-on” assets are surging on the basis that the US electorate has delivered a definitive result – even bitcoin has hit a record price. But major geopolitical tension – let alone a new conflict – would send anxiety spiking once again. Many investors will worry that feels more likely under President Trump than under his predecessors and opponents.