This week in the markets: how investors see Trump 2.0

Just about a month on from the US Presidential election, investors have cast their vote. And rightly or wrongly they are clear how they view a second Trump term - good for America, less good for the rest of the world.

The scorecard

In the equity market, the performance premium of US stocks over the rest of the world has more or less doubled since the election from 10% to 20%. In some sectors, it’s been more than simple outperformance but a parting of the ways - US banks have soared while those in the Eurozone have fallen sharply.

And, unusually, the rally is broadening as it matures. Usually, bull runs start broad and end narrow but this time around a Magnificent Seven fuelled surge has widened to include mid and small caps. The Russell 2000 index has finally exceeded its 2021 peak as investors decide that Trump 2.0 will be good news for smaller American companies.

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Other winners include, most obviously, Bitcoin which soared until it finally hit resistance at close to $100,000. Trump is a crypto fan. It remains to be seen how much further the biggest crypto currency can go, or whether, in keeping with previous surges, it is followed by a momentum-led retrenchment.

The dollar is also on a roll. Trump has stated his preference for a weaker currency, but he may get no choice if, as expected, the Federal Reserve holds fire on many more rate cuts in the face of a firing-on-all-cylinders US economy.

Trump’s America First strategy - tariffs, tax cuts and less immigration - will most likely push inflation higher, leading to higher for longer interest rates and put a floor under bond yields. Fed chair Jay Powell is keen not to repeat the mistakes of previous soft landings when inflation was allowed in the back door for a second surge in prices.

Where next for the bull market?

The rise in US stocks has been in large part about valuations. This year’s rise has been fuelled by a 1% dividend, 8% earnings growth and a 22% increase in the price-earnings ratio. In emerging markets, by contrast - while dividends and earnings have made a similar contribution, the valuation multiple has been largely absent.

On the earnings front, the outlook remains bright. This year’s 10% rise in profits is expected to be modestly exceeded in 2025 and 2026. That’s a faster rate of growth than in the rest of the world. And goes some way to justifying higher valuations. But it may not leave any room for a higher PE ratio, which already stands at 22.5 for the S&P 500 and nearly 20 for the equal-weighted version of that index. Earnings will have to pick up the baton next year.

Meanwhile, on this side of the pond

Over here, attention is on France where political instability is showing up in the financial markets. An uneasy coalition since inconclusive elections in the summer looks like breaking apart as Marine Le Pen of the National Rally sees an opportunity to bring the government down over a controversial Budget from centre right Prime Minister Michel Barnier.

Uncertainty has already seen the French stock market underperform the European average by 10% since the spring. But it’s the bond market which really matters here. Government bonds now yield more in France than Spain. And briefly last week it cost the French government more than Greece’s to fund its debts.

Oil in focus

Also in the spotlight this week, will be the oil price. Opec is meeting to discuss production quotas having curbed output for a few years to boost the cost of crude in the face of flagging demand, especially from China. With the meeting postponed at the eleventh hour, it looks like there’s disagreement within Opec between those that want to boost revenues by pumping more oil and those that want to keep the price higher by sticking with voluntary cuts.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. Investments in emerging markets can be more volatile than other more developed markets. Overseas investments will be affected by movements in currency exchange rates. If you are unsure about the suitability of an investment you should speak to one of  Fidelity’s advisers or an authorised financial adviser of your choice.