First, let’s spend some time on Trump’s policy. Full live link replay >>
The most important thing you need to know is that Trump’s policies are pro-growth and pro-business, which should be constructive for the U.S. equity market in 2025.
For example, he has said that he wants to extend the 2017 personal tax cuts and lower the corporate tax rate.
The question here is:
How likely is Congress to approve Trump’s tax cut plan?
The answer is quite likely because Republicans have a majority in the House and Senate.
Trump also pledges to lower the corporate tax rate from 21% to 15% for corporations that manufacture products in the U.S.
The purpose is to bring manufacturing back to the U.S.,meaning more Americans will have jobs, which will boost the labor market.
In addition, Trump wants to impose a 60% tariff on goods from China and a blanket tariff of 20% on goods from everywhere else.
Trump also wants to crack down on illegal immigration.
The popular view here is that a crackdown on illegal immigration and tariffs will cause inflation.
Yes, I agree that tariffs will cause inflation depending on how much is imposed.
Crackdown on illegal immigration will also lead to higher prices because of labor shortages.
However, what the media outlets don’t tell you is that Trump also plans to bring down energy prices.
So, if oil prices come down, perhaps inflation will not be that serious.
Besides,
As a result of the immigration crackdown and bringing manufacturing back to the U.S., more U.S. citizens will be employed, and they should also see a pay rise, wage growth.
So, if wages in the U.S. are rising faster than inflation, U.S. workers will have more purchasing power.Therefore, inflation is not scary.
So, I’m not too worried about inflation.
Next, Trump also wants to have a say in the FOMC rate decisions made by the Federal Reserve.
Because Trump has promised lower interest rates despite the inflation risk.
In 2017 and 2018, Trump tried to remove Jerome Powell as Chair of the Federal Reserve.
Recently, Jerome Powell said in the latest FOMC meeting that he would not resign if Trump asked him to.
Personally, I believe that Jerome Powell will most likely maintain the Federal reserve's independence, even if he is once again being threatened by Trump.
Seldom Does a Fed Chair Serve More Than Two Terms,Source: Bloomberg, 7 Nov 2024
Seldom does a Fed Chair serve more than two terms or eight years.
I think Powell may not be optimistic about being reelected as Fed Chair when his term expires in May 2026, so he will not be swayed by anyone in terms of FOMC rate decisions.
Given the U.S. economic strength and reflationary risks under the Trump administration, I believe Powell will likely cut rates cautiously and slowly in 2025 and 2026.
However, I still don’t think he would raise interest rates, especially given the weakening labor market.
Overall, I believe Powell is dovish.
Trump Trade 2.0: Which Sectors Will Benefit?
Which sectors will benefit under Trump 2.0?
A lot of analysts say it’s the financial sector, and I agree.
Some of the investment theses for the financial sector include:
Firstly, financial deregulation
The story here is that regulators are expected to ease capital rules, allowing banks to have fewer constraints and use more cash for lending or share buybacks.This would likely lead to more mergers and acquisitions, as well as less antitrust enforcement.
Secondly, a stronger economy will benefit cyclical sectors like banks.
Personally, I’m not very familiar with U.S. banks, but I think one of the better ways to gain exposure is through bank ETFs, like the $Financial Select Sector SPDR Fund(XLF)$ ETF.
Additionally, I like $Visa(V)$ , $MasterCard(MA)$ , or $Berkshire Hathaway(BRK.B)$ .
The energy sector should also benefit under Trump. $Energy Select Sector SPDR Fund(XLE)$
Trump previously vowed to cut U.S. energy costs by 50% within the next year. This is why, a few days ago, Trump also called for a deal to end the Ukraine war—because he wants to bring down energy prices.
Trump also wants to quickly expand oil and gas drilling. However, I am unsure about the energy sector. I believe that, even though oil and gas companies will increase production under Trump, energy prices will also be lower.
This is because Trump wants to reduce energy prices to fight inflation. So, ultimately, I don’t think oil and gas companies will benefit much.
It’s like oil and gas companies can increase production volume but will be selling at a lower price. Therefore, I am neutral on the energy sector.
Next automobile industry.
Trump is not a big fan of electric vehicles (EVs). This is why he wants to remove the $7,500 consumer tax credit for electric vehicle purchases.
Ideally, traditional automakers like Ford and GM should benefit from this, but I’m not very optimistic about the traditional car makers. The internal combustion engine (ICE) industry has not been performing well for the past few years.
I believe Trump’s policies may help traditional carmakers survive longer, but I am still cautious about their long-term outlook.
I believe if Trump really revokes the $7,500 tax credit for EVs, it could potentially benefit $Tesla Motors(TSLA)$ . Tesla might need to cut car prices,which would reduce its profit margins.
However, other EV makers would incur more losses if they were to cut prices, which gives Tesla a competitive edge.
Additionally, Trump may also increase tariffs on EVs from China, which could benefit U.S.-based EV makers.
There are some hurdles for Tesla’s robotaxi business.
Currently, the NHTSA only allows every EV maker to deploy 2,500 robotaxis per year,but Tesla wants more than 2,500.
Some states still require steering wheels and pedals, and Tesla also needs state approval to run its robotaxi business.
However, Elon Musk has been pushing for federal approval, and Trump is expected to help Tesla with the robotaxi rules.
This is why Tesla’s stock price has increased by 90% since Trump won the election. To me, I only like Tesla in the automobile industry.
The sector I like the most is technology.
Basically, if the U.S. wants to win the tech war, it needs to make its technology companies stronger. Some of the investment thesis include:
Firstly, AI deregulation:
The Trump administration is committed to strengthening U.S. leadership in AI.Trump has previously promised to roll back Biden’s executive order on AI.
Secondly, the FTC Chair Lina Khan is widely expected to be removed by Trump in January:
The Federal Trade Commission (FTC) is the agency responsible for enforcing antitrust law in the U.S.Over the past few years, the FTC has targeted big tech companies by blocking mergers and acquisitions and suing them for monopolistic practices.
It is widely expected that big tech companies like mag 7 will benefit from Lina Khan’s resignation.
Thirdly, Trump is expected to be business-friendly:
Trump is likely to encourage more mergers and acquisitions and an overall reduction in tech industry regulation.Some analysts also speculate that big tech companies may ask for Trump’s help to pressure the EU and UK to stop imposing lawsuits against them for monopoly.
All in all, in order to preserve the U.S.'s position as the global technological leader, the technology sector, especially the AI sector, should be a key focus for Trump’s support.
Here, I want to show you the sector performance.
This column represents the 2024 year-to-date return, and the rest are the monthly returns. A couple of takeaways here:
Firstly, tech-related sectors like communication, technology, and consumer discretionary remain some of the top-performing sectors this year.
Especially in December, when other sectors were dropping, these three sectors made a comeback.
This is why I like tech sectors—because with or without Trump's policies, AI is an organic growth trend.
The sector could do well simply due to the AI boom.
Secondly, sectors poised to benefit from "Trump 2.0"
— namely, the Industrial, Financial, and Energy sectors — began to experience corrections in December.
For example, financials went up 10% in November but dropped 7% in December so far.
Energy went up 7.7% in November but dropped 12% in December.
These sectors may have overpriced Trump optimism, so investors are shifting their focus back to long-term secular trends, particularly AI-related sectors.
In short, I prefer tech-related sectors rather than other Trump-benefiting sectors because Trump may underdeliver on his promises, but the AI trend should continue regardless.
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