U.S. stocks have looked subdued at times over the past few weeks as rising interest rates and debate over whether the Federal Reserve will cut rates in 2025 sent the S&P 500 (^GSPC) to its lowest level since the election.
But better-than-expected inflation data on Wednesday helped lift U.S. markets, and Bank of America investment strategist Michael Hartnett believes President-elect Donald Trump will "protect" the S&P 500 in the coming months. further decline in the index.
During his first term as president, Trump viewed the stock market as a barometer of his administration's success. The expectation among many investors is that Trump will remain sensitive to a pullback in U.S. stocks during his upcoming term.
While tariffs are a concern for investors and businesses, other Trump policies could be positive for stocks.
Deregulation is seen as a boon for banks and could encourage more deals after a challenging few years. A more crypto-friendly government has fueled a surge in this market, while lower corporate tax rates could help boost corporate profits across industries. Trump's "America First" slogan has also boosted optimism among small businesses and could also be seen as a tailwind for small-cap companies.
However, Hartnett warned that other factors, such as the market's high valuations and concentration in the index (just 10 stocks account for nearly 40% of the index), may also be limiting the S&P 500's upside.
One question remains whether the rally in certain "Trump trades" such as small-cap stocks, energy stocks and financial stocks will rebound after the election but end up giving back most of the pre-inauguration gains.
Hartnett added that if Trump 2.0 and lower interest rates fail to keep the small-cap Russell 2000 (^RUT) index sustained above its 2021 highs, asset allocators may reduce their overweight positions in stocks.
Overall, strategists agree that Trump's policies could still be a tailwind for U.S. stocks, but they don't expect those gains to be straight-up.
"January ahead of Trump's 1/20 inauguration," Julian Emanuel, head of Evercore ISI's equity, derivatives and quantitative strategy team, wrote in a note to clients Thursday evening. The volatility reinforces the core view of a more volatile year ahead.”
Emanuel expects the S&P 500 to close at 6,800 points by 2025, up about 13% from current levels, and he still believes that the Trump administration will cause investors to trade between "risk-on" and "risk-off" sentiments Keep rocking.