Christopher Johnson: There is no denying that the US is the king of all equity markets. But as the world awaits the return of Donald Trump to the white House, there is a debate raging about whether his Maganomic agenda will bolster or hinder US equity markets.
To discuss all this and more, I’m joined by Tom Becket, the co-CIO of Canaccord Wealth Management. Tom, thank you so much for being here with me.
Tom Becket: Thank you for having me.
Trump and the Equity Market: A Match Made in...
CJ: So my first question to you is who is right about the impact of Maganomics, bullish stock investors or bearish economists?
TB: Well it could be both at the same time. And I think there’s a lot of unknowns as to what the Trump policy agenda might be. You know, one can scan the various different mediums of social media to try and work out what’s really going on. But no one really knows. And I suspect there’s elements that Donald Trump doesn’t know himself. I mean, let’s break it down into some simple measures from an economic perspective and from the perspective of corporate earnings. Donald Trump is probably likely to be quite good on balance. You have to work out what’s priced into stock markets. But I think his growth agenda is there. And I think that his willingness to support companies is also there. So I think in the sort of short to short medium term, there will be a sugar rush for that. And equity markets have started to reflect that in the last few months for the medium term projection, though, it’s much more difficult to know, not least because the policies, but also the US is in a situation where there’s a lot of debt, there’s a lot of situation where the economy looks quite strong, but it’s patchy beneath the bonnet.
TB: So I think from a medium term perspective, the economic path is is still yet to be decided. But who’s right or wrong? I think the economic situation is probably set fair for the short run. And I think stock markets will do okay this year. And do you think the Mag 7’s dominance will continue in 2025? Or could this be the year that the bull run halts? Well, I think the magnificent title they’ve been given is appropriate because the share price performance is obviously magnificent, which is what gin is generated, all the excitement. But again, if you look at those companies, they’ve been magnificent in themselves. Great companies, great balance sheets, great profits, great profit margins, great revenues, great products that people want to buy at the right time. These are some of the best corporate success stories we’ve ever seen in history. And history is obviously a very long time, Chris. But I think the question more is will they carry on doing as well as they have done from a stock market performance going forwards?
TB: I think you have to admit that these companies are, on balance, expensive. It’s arguable whether or not they are there to our global financial markets. Reassuring and expensive. But they are expensive. All suspicion is if Trump is a supporter of the economy and corporate profits, as he’s likely to be. Will that lead to a continued broadening out of stock markets where the Mag 7 might still do okay, but other parts of the market do better? I think there’s a case to be made for that on pure valuation terms, and also on the basis that corporate earnings across the US economy should be better, rather than just having this very concentrated effect we’ve had for the last few years.
Sectors to Watch in the Second Trump Era
CJ: What other parts of the US equity market do you think could do well this year?
TB: Now, what’s been interesting from the immediate reaction to stock markets after Trump’s election is that people quite quickly tried to price in a similar account to what we saw in 2016. But let’s be honest, you know, more people expected Trump to be elected this time around than didn’t. So the betting markets really had it right in 2016. It was a real shock. Nearly everyone suggested that Hillary Clinton would win the election back then. So the market pricing was immediate and also carried on for some time to come. What we’ve seen recently, particularly on things like small cap and mid-cap growth shares, they immediately did quite well following the 2016 path and then rolled over. If you look at things like small cap equities, they are below the level now. They were on the election day, which is which is showing you that a lot of these things being quite short lived. I think where we’ll see a longer run effect is upon some of those sectors where, the Trump effects will be most keenly felt.
TB: The financials were a very strong performer last year, alongside technology. Quite strange bedfellows. In all honesty. I expect the positivity towards, the financial sector to continue. But I think broadly it could be a tide of rising tide floating all boats, but some boats will float higher than others.
CJ: And on Trump’s protectionist policies, do you think, they will make it more difficult for the Federal Reserve to cut rates if necessary?
TB: Now the Fed’s in a very difficult position here, and I think they’ve admitted that through their somewhat sclerotic approach of recent times, and they box themselves into a corner to a certain extent by being data dependent. And as the data changes, so does market repricing of Fed decisions. And the Fed decisions ultimately themselves will be different to what they were expected previously. I mean, since the Fed started this rate cutting cycle, we’ve seen an extraordinary move higher in bond yields. Quite the opposite of what people might have expected. So does the Trump agenda make it more difficult for the fed on the basis of tariffs? Undoubtedly because there’s more uncertainty. The growth policies undoubtedly of the targeting of government inefficiencies. Undoubtedly, there’s an awful lot going on here, which makes an already difficult task, the Federal Reserve even more difficult. I think the market is right to suppose that the Fed is on hold for some time here. If I was in charge of the Federal Reserve, that will never happen. But I would suggest that’s being a very sensible move. And give it a few months and then reassess once we really know what’s going on.
What Trump’s Second Term Means for Global Markets
CJ: And what are your views on how Donald Trump’s Maga agenda will affect the rest of the globe?
TB: That’s a very good question, and I’m not sure we entirely know right now. I think the interesting way to look at it is what’s expected and where could be the upside surprises. And let’s think about one domestically first. And then I think about one internationally. So, the immediate assumption is that the second Trump administration will be negative for health care because of Robert F Kennedy’s role within the cabinet and some of the conversations that he’s had around health care companies previously. Now that that’s possible. But a lot of this is priced in. The health care sector has been a very poor relative performer, and there’s a lot of negativity around the sector. So what if things aren’t as bad as previously expected? Could health care be a surprisingly good performer this year in the US, like it has been in the first year of most presidential cycles, if not all of them back through history.
TB: The international agenda is even more complicated than the domestic agenda in the US. But again, it’s about thinking what is priced in and what could actually go right in the long run. Now everyone is expecting, because Donald Trump has made it very clear that tariffs are coming and tariffs aplenty are coming. But what happens if those tariffs aren’t as bad as people are expecting right now? Could we see a return to favor from Asian equities, from European equities, from even UK equities I think possibly so I think what are the tails for this year. It’s trying to look through all the noise, all the nonsense and really trying to work out where there are certain benefits to either liked investments or loathed investments and trying to take advantage of inefficiencies created by what’s going to be a very noisy year in 2025.
CJ: Tom, thank you so much for being here.
TB: Thank you for having me.
CJ: This is Christopher Johnson for Morningstar UK.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
