Why Trump won’t derail the US stock market

Barclays’ global head of research expects Trump to deliver manageable policy changes, cautioning investors to “take him seriously but not literally”.

US stocks are set to continue their strong run, according to a top Barclays exec Picture: Spencer Platt/Getty Images

As far as the US stock market is concerned, Barclays’ global head of research Ajay Rajadhyaksha expects US President-elect Donald Trump to deliver manageable policy changes which won’t stop ‘exceptionalism’ in stocks.

As markets start to fret about inflation and interest rate risk from Donald Trump’s policy agenda, Ajay Rajadhyaksha is expecting manageable change in immigration, fiscal and trade policy.

The global chairman of research at Barclays says investors should “take Trump seriously but not literally”, at least on the degree of policy change.

While expecting extended US tax cuts and higher tariffs, Mr Rajadhyaksha expects much less fiscal stimulus, spending cuts and deportation of illegal immigrants than Trump has indicated.

In his view it won’t stop the US “exceptionalism” which has driven US stocks for the past two years.

The S&P 500 is up 23 per cent year to date after rising 24 per cent in 2023.

It has been led by a 40 per cent rise in the so-called “Magnificent 7” tech giants.

Nvidia is up 187 per cent year to date. The $3.48 trillion ($5.38 trillion) market darling is due to report its quarterly earnings after the US close on Wednesday.

Barclays global chairman of research Ajay Rajadhyaksh.

US stocks took off after the recent election, with the S&P 500 up 4 per cent within days.

It retreated last week as the US 10-year bond yield hit a six-month high of 4.5 per cent.

The 10-year yield has risen as much as 90 basis points in the past two months as economic data lessened the case for rate cuts and markets have worried about the inflation outlook under Trump.

However, while the extent of Trump’s victory appears to give him a strong mandate, he will struggle to get all of his policy agenda through Congress with less than 60 seats in the Senate.

In 2016 Trump ran on repealing Obamacare, but even with 60 seats in the Senate, he couldn’t.

His 53 Republican Senate seats now gives him a “tiny” three-seat majority.

“It is very hard, even with one party controlling all three levels, levels of power, to take things away from the American people,” Mr Rajadhyaksha said.

Trump has spoken of deporting 11 to 14 million undocumented immigrants, but it is “logistically impossible” according to Mr Rajadhyaksha. More likely, deportations will be up to 500,000 a year — similar to the Obama years — and new immigration will slow, slightly trimming economic growth.

On the regulatory front, a regulatory “freeze” is expected to help the financial services sector in the US and overseas by discouraging countries from imposing new Basel 3 capital requirements.

On fiscal policy, Trump’s planned tax cut extension will add $US5 trillion to the US deficit over the next decade. But, $US3 trillion of this was already going to happen because the middle class income tax cuts would have been extended if the Democrats had won.

“So, it’s an extra $US2 trillion because of the election change, and I think the bond market has digested that,” said Mr Rajadhyasksha. “It’s part of the reason why bonds sold off since September. The administration will struggle to pass a major new tax cut with its tiny majority in the Senate.”

The President has the power to impose tariffs, and has proposed a 60 per cent tariff on goods from China and 20 per cent for the rest of the world. Currently, the US has a 20-25 per cent tariff on half of Chinese imports which Trump imposed in 2018, and an average tariff of 2 per cent globally.

China “diluted” the impact of tariffs in 2018 by depreciating the yuan by 10 per cent and pushing goods through connected countries like Vietnam, Mexico and Bangladesh.

This time around the blanket tariffs might actually be a bigger deal for the global economy because US importers will “have no place to hide”.

Still, as in 2018, Trump is expected to use the threat of tariffs as a bargaining chip to lower tariffs on US exports. Barclays is assuming a 5 per cent blanket tariff and 30 per cent tariff on China.

The reason is simple — inflation was the top issue of the US election, immigration number two and unfair trade way down at number 15. Trump may seem unlikely to take the number 15 issue to the extreme if doing so hurts the number one issue.

And for a President who equates the success of his economic policies with the stockmarket, if he were to try “extreme” tariff plans, a falling stock market would lead him to “course correct.”

Overall, Mr Rajadhyaksha says the US is “in an extraordinarily strong position” globally.

Five to 10 years ago there was a lot of talk about China becoming the world’s biggest economy.

But, it may “grow old before it grows rich” as it struggles to break the “middle-income trap”.

China is now an $US18 trillion economy versus $28 trillion for the US.

Similarly, the Euro-area economy, which was about the same size as the US after the GFC, is now well behind the US at $US15 trillion.

Whereas the Euro-area has lost its cheap natural gas from Russia, the US is now an “energy superpower,” according to Rajadhyaksha.

Clients don’t ask him what ECB chief Christine Largarde is doing, they want to know about Fed chief Jerome Powell. On top of this, he sees the US as “the pre-eminent technology superpower.”

Other markets such as Europe look cheaper than the US, but may be “cheaper for a reason”.

But, after an exceptionally strong rise in the S&P 500 over the past two years, he sees only a low-single to mid-single digit percentage rise in the S&P 500 in 2025.

“That would actually be healthy, but I am arguing for US exceptionalism.”

That’s in the context of 10-year bond yields staying elevated in a 4-5 per cent range, in his view.