The second Trump administration could be a boon for stock pickers, according to a team of equity strategists at Barclays.
In a report recently shared with MarketWatch, the team decided to look back at how markets reacted to President-elect Donald Trump's surprise victory in 2016 to glean some insights into how things might play out this time around.
What they found is that performance among the S&P 500's 11 sectors was remarkably uneven during Trump's first year in office. A similar pattern was initially seen in Europe but faded within a few months as U.S. stocks blew past their European peers.
A repeat would create more opportunities for active managers to outperform benchmarks like the S&P 500, ushering in the return of a "stock picker's market," according to Venu Krishna, the head of U.S. equity strategy at Barclays.
So far, movements across markets following Trump's latest victory have been remarkably similar to what investors witnessed in 2016, so active managers have reason to be cautiously optimistic.
Investors have already demonstrated an eagerness to identify stocks that could be potential winners - or losers - during a second Trump administration.
Many had started to pile into so-called Trump trades ahead of the election. That saw the U.S. dollar strengthen and a host of stocks surge, including regional banks, private-prison operators, Tesla Inc. $(TSLA)$ and cryptocurrency stocks like MicroStrategy Inc. $(MSTR.AU)$.
Stocks took off after Trump was declared the winner, mirroring the reaction in 2016, which saw stocks soar after reversing an overnight plunge in the futures market.
Major indexes like the S&P 500 SPX, Nasdaq Composite COMP and Dow Jones Industrial Average DJIA charged to their best weekly advance of 2024. The dollar soared, while the Mexican peso $(USDMXN.FOREX)$ tanked.
But beneath the surface, moves across sectors have already seen a dramatic divergence: Financial and energy stocks have soared since the start of November, while the healthcare sector has lagged behind, according to FactSet data.
Many active managers have historically struggled to outperform benchmarks like the S&P 500, although there have been signs recently that their fortunes might be improving.
Data from S&P Dow Jones Indices showed 57% of all active large-cap U.S. equity managers tracked by the firm underperformed the S&P 500 during the first half of 2024. That number was actually better than expected and consistent with 60% outperformance from 2023, according to a report from Anu Ganti, S&P DJI's head of U.S. index investment strategy.
Since the start of the year, divergence between sectors has fallen dramatically, according to the Barclays team, as the bull market broadened out from the handful of Big Tech names that commanded most of investors' money and attention in 2023.
But Trump's heterodox approach to policy making and uncertainty surrounding his post-inauguration priorities should create plenty of opportunities.
"We think this makes sense as policy shifts during Trump's first stint in the White House significantly reshuffled opportunities for upside among sectors. Will the same happen this time? Initial reactions seem to suggest that the market thinks so," Venu Krishna, the bank's head of U.S. equity strategy, said in a report shared with MarketWatch.
There were signs that a stock picker's market was already starting to take shape before Trump's victory on Nov. 5.
Investors had proven increasingly eager to reward winners and punish losers earlier in the third-quarter earnings season.
In a report published shortly before Election Day, a team of equity strategists at Bank of America found that the average move in shares of companies that had just reported earnings had increased to 5%.
That was on track to be the second-largest average move during earnings season stretching back to 2014. Only the previous quarterly reporting season had seen larger swings.
Realized moves this earnings season were also on track to surpass expectations from options traders for only the second time in history.
These are all signs that stocks are generating more "alpha" as moves in individual names increasingly exceed what's taking place in the broader market. By BofA's count, idiosyncratic moves in stocks have risen to near-record highs lately.
The result? A "stock picker's paradise," the BofA team said.
Major U.S. indexes were trading lower on Wednesday as stocks continued to struggle to build on their postelection gains. The S&P 500 SPX was down 23 points, or 0.4%, at 5,893, according to FactSet data.
The Dow Jones Industrial Average DJIA was off by 27 points, or 0.1%, at 43,241. The Nasdaq Composite COMP was down 100 points, or 0.5%, at 18,888.