The bull market faces a “reality check” with Donald Trump’s arrival to the White House next week. Although the futures of Wall Street They anticipate a positive opening for stocks this Friday, caution could advance as the session progresses, as traders will be attentive to signs that emerge over the long weekend.
The markets will be closed on Monday for the holiday. Martin Luther King Jr.the same day President-elect Donald Trump will take office for his second term. However, the political theater in Washington could pose a problem for stocks, according to Daniel Von Ahlen, senior macroeconomic strategist at GlobalData TS Lombard.
“It is likely that the actions face pressure if he announces tariff measures more drastic than those currently discounted or opposes the idea of a more gradual implementation of tariffs, as his team of economic advisors has recently suggested,” Von Ahlen says.
The reason why the stock market is so vulnerable to this scenario, according to Von Ahlen, It’s because valuations currently imply investor optimism.
He highlights that one of the main reasons why the S&P 500 has gained almost 60% since January 2023 is that Wall Street had relatively bearish expectations about economic growth of the US and earnings per share.
“US recession forecasts dominated in both 2023 and 2024, which meant that the threshold for exceeding those expectations was relatively low. In fact, in January 2023, the consensus forecast for US growth was only 0.3%, while the growth turned out to be 2.5%, which fueled a huge increase in share prices,” Von Ahlen says in a note published this week.
Similarly, the current estimate for US growth in 2024 is more than double what was expected at the beginning of that year.
Trump: what could go wrong
However, at 2.1%, the current consensus estimate for US GDP growth in 2025 is notably more optimistic than that seen over the past two years. Thesesuggests greater vulnerability for stocks at a time when global policy uncertainty is high and valuations (relative to bonds) have become even more expensive,” Von Ahlen says.
Additionally, the rise in Treasury yields following last week’s nonfarm payrolls report shows that better-than-expected growth will result in tighter financial conditions, which will weigh on stocks.
“Stocks have continued to struggle [este año]suggesting that tighter financial conditions (+100 basis points in US 30-year bond yields, +9% in the DXY index [dólar] since mid-September) are causing more and more problems for stocks, as higher yields are being offered on safer assets,” says Von Ahlen.
Noteworthy is that the last time 10-year bond yields reached 5% – in October 2023 – the S&P 500 entered correction territory. “Stocks will skate on thinner ice if the market adopts our long-held view that there will be no Fed cuts this year,” he says.
To account for the risk of an imminent Trump tariff shock affecting such a vulnerable market, Von Ahlen suggests the following trade. Buy U.S. high-yield credit through the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), and sell shares, using the SPDR S&P 500 ETF Trust (SPY), “as the stock will likely will perform worse than credit in this scenario.”
However, he suggests putting a tight stop on the trade (a predetermined level at which a losing position will be closed) “in case Trump adopts more conciliatory rhetoric on the tariff front.”
Source: Ambito
I am an author and journalist who has worked in the entertainment industry for over a decade. I currently work as a news editor at a major news website, and my focus is on covering the latest trends in entertainment. I also write occasional pieces for other outlets, and have authored two books about the entertainment industry.
