To The Moon

The Market’s Reaction and Performance

Index

Following Donald Trump’s re-election, U.S. markets experienced a substantial rally as major indices climbed to unprecedented highs. The $.SPX(.SPX)$ ended the week up 4.7%, the $.DJI(.DJI)$ rose 4.6%, and the $.IXIC(.IXIC)$ ncreased 5.7%… $NVIDIA Corp(NVDA)$ $Tesla Motors(TSLA)$ … , making it the best week of 2023 for all three indices. This surge reflects optimism surrounding Trump’s anticipated pro-business policies, which include tax cuts and reduced regulation that could drive corporate growth. The clarity provided by a decisive election outcome allowed the CBOE Volatility Index (VIX) to plummet 32% for the week, marking its largest drop since December 2021, suggesting a substantial decrease in market uncertainty.

$TSLA

However, the U.S.-Europe economic chasm widened further as European markets struggled with political instability in Germany, disappointing earnings in the luxury sector, and concerns over potential U.S. tariff increases. Across the Atlantic, stocks faced headwinds from weak corporate earnings, particularly in luxury goods, and were further dampened by political turbulence. The energy sector, while somewhat bolstered by OPEC+ delaying its production increase, remains on shaky ground as U.S. energy policies are expected to favor fossil fuels over renewables.

Sector and Asset Class Highlights

• Energy Sector

Despite a pro-fossil fuel administration, oil markets remain cautious. Although reduced emphasis on renewable energy could boost oil demand, increased U.S. production capabilities may counterbalance any price gains. Short-term factors like Hurricane Rafael’s disruption in the Gulf of Mexico and OPEC+’s decision to postpone a production increase provided temporary support, with Brent crude and WTI crude trading slightly higher. Over the longer term, however, investors must weigh increased U.S. production against any demand rise, especially if environmental regulations are eased.

• Metals Sector

Precious metals, gold prices dipped to $2,690 per ounce as easing political fears led to profit-taking, and rising U.S. bond yields further reduced demand. Bond yield increases, particularly the 10-year Treasury yield now around 4.46% to 4.55%, indicate inflation concerns, which could eventually cool growth and impact precious metals if interest rates continue to rise.

Risks and High Expectations in the Current Market

While Trump’s pro-business outlook has generated a bullish sentiment, experts caution against overly high expectations. Current stock market valuations are steep, with the S&P 500 trading at 22.2 times forward earnings, well above its five-year average of 9.6. Market frothiness is amplified by elevated investor expectations, which contrasts sharply with the cautious optimism seen during Trump’s first term. With core inflation higher and the federal deficit at 6.3% of GDP—more than twice its 2017 level—any economic missteps could expose these high valuations to downside risk.

Earnings and Market Valuations

Earnings reports from S&P 500 companies show that about 90% have posted third-quarter results, with 75% surpassing Wall Street estimates. However, the average beat margin of 4.3% falls below the five-year average of 8.5%, signaling that companies are achieving moderate growth but not exceeding historical standards. Year-over-year growth in earnings of 5.3% for the S&P 500 reflects resilience, though at elevated valuations, it indicates that investors are paying a premium for modest returns. This valuation premium underscores the heightened stakes in the current market environment; the higher-than-average price-to-earnings ratio points to future growth expectations that may be challenging to sustain.

FactSet

Future Catalysts and Economic Implications

• Federal Reserve’s Monetary Policy

The Federal Reserve’s recent 25 basis point rate cut was expected to stimulate further growth, but the rise in long-term yields indicates inflationary concerns that could drive up borrowing costs, especially for smaller companies. Investors are keenly watching the Fed’s next moves, as Trump’s policies might increase inflationary pressure, challenging the Fed’s ability to maintain a dovish stance without risking inflation acceleration. Higher rates would make debt more expensive, potentially cooling stock market enthusiasm, especially if rates breach critical levels and approach the 5% mark.

• Fiscal Policy and Deficit Implications

Trump’s promise of tax cuts poses both opportunities and risks. While tax reductions may boost corporate profits and stock prices, they also risk expanding the federal deficit, exacerbating inflation, and pushing yields higher. Deficit-driven inflation could prompt the Fed to rethink rate cuts, potentially leading to higher costs of capital, particularly impactful for highly leveraged firms.

Conclusion: Opportunity Amidst Uncertainty

The initial post-election market rally reflects strong optimism toward Trump’s re-election and its potential benefits for corporate America. Investors are looking to capitalize on a predictable policy environment that favors pro-business strategies, including tax cuts, deregulation, and infrastructure investment. However, elevated valuations and inflationary risks suggest that market optimism must be tempered by caution. With the **S&P 500** and other indices trading at historic highs, investors must carefully assess how sustained growth, inflation risks, and international tensions may affect future returns.

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This analysis is for informational purposes only and does not constitute investment advice. Markets are volatile, and investments carry risks that may affect returns. Readers are advised to consult financial professionals before making investment decisions, as projections are inherently uncertain and subject to change based on evolving market conditions.