Post-Election Vibes, New Year Realities

The rush into risk assets could last through the end of the year, but thereafter the outlook becomes more complicated.

After faltering on the eve of last week’s U.S. election, the “Trump trades” came roaring back as the scale of Donald Trump’s victory became clear.

Equity markets rose, particularly small caps, Japan, energy and financial stocks. Bitcoin surged. So did the dollar. By contrast, U.S. Treasuries slumped.

Last week, Erik Knutzen and Jeff Blazek suggested that the market had already largely priced for this outcome, and that these trades could fade in the aftermath. We continue to believe that is the case, but we think the current rush into developed-market risk assets could last through the end of the year. Thereafter, the outlook could become more complicated.

Sentiment

This election result is a major boost to small-business sentiment in the immediate term, as executives anticipate lower taxes, deregulation and a much friendlier attitude toward dealmaking and M&A. That is likely to sustain the flows into smaller companies, private equity and other financial sector stocks, health care, energy and cyclical industrials.

Uncertainty looms for 2025, however.

A major reason Trump won so many votes is that three years of high inflation have left a lot of lower-income consumers sour on the economy. Continued disinflation is therefore the thing most likely to generate a turnaround in consumer confidence, but key parts of Trump’s policy platform, such as higher tariffs and tighter immigration, could arrest the decline in inflation or even help reaccelerate it.

Some deregulation could provide a disinflationary counterbalance, but even that is not necessarily a simple positive for equity markets. Trying to lower the price of oil and gas for consumers could eventually weigh on energy stocks, for example. Rolling back parts of the Inflation Reduction Act (IRA)—assuming that is supported by Republicans in Congress whose constituents are IRA beneficiaries—could undermine the investment case for many industrial stocks and subsectors. An appointment like Robert F. Kennedy, Jr. might just create unpredictability in the health care sector.

More broadly, the higher-for-longer rate environment priced into U.S. bond markets last Wednesday morning could build into a headwind for equities in general and non-U.S. mega-cap tech segments in particular. After all, the incipient, short-lived broadening of equity market performance that we saw in the third quarter corresponded with expectations for a faster series of rate cuts from the U.S. Federal Reserve.

As we enter the New Year, investors may start to question whether small caps, value stocks and cyclical sectors will be supported by a more laissez-faire environment or weighed down by stubbornly high inflation and rates.

Terminal Rate

That brings us to the Treasury market.

As Ashok Bhatia and Brad Tank wrote two weeks ago, we came into the election anticipating that last Thursday’s Fed rate cut would be joined by another in December and then a pause that was not priced in by the market. Our Fixed Income team maintains that view, and the market has moved in our direction since the vote.

Our view on fair value for the 10-year yield is a wide range around 4.25%, and while the election result could move that range slightly higher, the bump up toward 4.5% could be testing the limit.

Some might ask why Trump’s deficit-swelling fiscal stance should not power us through that limit, given growing debt sustainability concerns. Our answer is that we think any rise in yields we see in the immediate term will be mostly due to adjusting growth and inflation expectations and the rotation into risk assets.

The Treasury is relatively well funded through 2025, and details of Trump’s tax-and-spend policies are likely to be sufficiently unclear, subject to Congressional horse-trading and long-term in their effects to push any substantial repricing of the term premium out to early 2026.

The volatility that has so far been centered on short-dated rates could move out along the curve next year, but the time for a tactical addition of U.S. duration could be drawing near.

Post-Election Vibe

Overall, then, we anticipate a broad-based, developed market risk-on rally into the end of this year. The post-election vibe is unmistakably and aggressively “pro-business.”

As the calendar turns and Inauguration Day gets closer, however, vibes could give way to a more complicated reality. There is little doubt, in our view, that this election result has made an already challenging 2025 still trickier for the Fed. That, together with the complex crosscurrents of the Trump administration’s new tax, spending, fiscal, trade and regulatory platform, is likely to widen dispersion in stock performance. Beta may be the trade for now, but we believe active management will be critical next year.