In nearly every outlook report, across almost every market and asset class, economists and analysts agree on one thing — there is no greater destabilising force ahead than the second term of US President-elect Donald Trump.
Trump 2.0 has been branded “contentious” by Standard Chartered and the soon-to-be 47th US president has so far put forth “conflicting economic policy goals”, according to DWS. Still, some are more sanguine; Julius Baer thinks the current consensus that the second Trump administration will increase deficits and reignite inflation appears “dangerously simplistic”.
“Trump’s appointees, including Elon Musk and Vivek Ramaswamy to the new Department of Government Efficiency and Scott Bessent as Treasury Secretary, signal that we may be at the dawn of a radically new era in US economic policy, one focused on libertarian principles of small government and deregulation,” writes Yves Bonzon, group chief investment officer of Zurich-based Julius Baer.
Bonzon acknowledges that “at the very least, it will be interesting to see how the ambitions of the incoming Trump administration translate into policy” come Jan 20, the day of Trump’s inauguration. “Uncertainty about the policy outcomes and the equilibrium price of assets has rarely been greater,” he adds.
However, the markets have welcomed Trump’s return so far. The S&P 500 index leapt some 23 points, or 0.4%, on the day of the US election, ending the week 5% higher. The index closed above the 6,000 mark for the first time in history on Nov 11, 2023, the next trading day.
Trump has proposed cutting the statutory tax rate for corporations from 21% to 15% — an extension of the cut from as high as 39% back in 2017 during his first term. While the proposed reduction is “unlikely” to lift US growth “by a noticeable amount”, it could raise S&P 500 earnings by about 400 basis points (bps), estimates Ronald Temple, chief market strategist at Lazard. Temple expects this legislation to be passed this year.
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UBS expects the S&P 500 to reach 6,600 by the end of this year. In comparison, Citi, Morgan Stanley, Goldman Sachs and JPMorgan see the S&P 500 rising to a more measured 6,500 by year-end. Standing on the bullish side are Bank of America, which forecasts 6,666, and DWS, which predicts 7,000.
Wells Fargo equity strategist Christopher Harvey and his team issued in December 2023 a new high-water mark: a 2025 year-end target of 7,007 points. “We expect the Trump Administration to usher in a macro environment that is increasingly favourable for stocks at a time when the Fed will be slowly reducing rates,” says Harvey in his outlook released Dec 3, 2023.
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Index concentration
Still, US equities’ profit margins “appear stable”, even at all-time highs, according to JP Morgan Wealth Management. “This decade, S&P 500 companies have returned nearly 75% of annual earnings to shareholders through dividends and net buybacks. In the 2000s, that share was only 50%.”
The S&P 500’s top 10 companies account for 36% of the index’s market capitalisation, the highest on record. Outside of the Magnificent Seven, some top names include semiconductor manufacturer Broadcom, Warren Buffett’s Berkshire Hathaway and financial services giant JPMorgan Chase & Co. “While index concentration in big tech firms remains a concern, every sector in the S&P 500 is expected to deliver positive earnings growth in 2025. This hasn’t happened since 2018,” notes JP Morgan.
US equities will likely deliver the strongest 2025 earnings growth (14.9%) among major markets, says StanChart, outperforming Europe (8.3%), the UK (5.6%), Japan (8.1%) and the rest of Asia (12.5%). “Our macro scenario, Fed cuts and US President-elect Trump’s stated policy priorities argue for continued outperformance of US growth relative to other major regions. This, we believe, will translate into superior earnings growth.”
StanChart says short-term investor positioning “may be a risk”, but their three-month technical model remains bullish.
Toss Securities, a South Korean brokerage, recommends investors target the summer period for possible buying opportunities. “Historically, US equities tend to perform well in the first year of a presidential term. In bull markets, the third year typically delivers the weakest returns. This aligns with the outlook for 2025, the third year of the current bull market. Modest corrections are expected in the summer and fall, which could provide attractive entry points.”
‘Disappointments will be punished’
For now, investors should remain alert about market-moving developments. As at Dec 5, 2024, the S&P 500 was trading at about 22 times on US$269 ($365.77) consensus earnings per share, representing approximately 12% anticipated growth. With such “historically elevated broad market valuations”, US earnings growth must deliver, says George Maris, chief investment officer, global equities at Principal Asset Management. “Nothing on the horizon is raising broad warning flags, but vigilance is needed as disappointments will be punished amid the current high expectations.”
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According to Maris, opportunities will likely arise in companies in “economically sensitive industries and overlooked sectors”. These include materials, capital goods, consumer cyclicals and financials. “The resilient but out-of-favour healthcare sector could experience improved breadth driven by greater M&A in response to recent market conditions,” he adds. “This backdrop also bodes favourably for small-and mid-caps, which quietly outpaced the long-dominant large-caps in 2H2024, yet still offer historic relative valuation discounts.”
UBS reiterates what the market already celebrates as outperformers among US equities: technology, utilities and financials. “AI-related companies that span semiconductors, cloud service providers, devices and data centres account for over one-third of the S&P 500 by market cap. We expect around 11% S&P 500 earnings per share growth in 2024 and 8% in 2025.”
UBS notes that AI infrastructure spending remains robust and key semiconductor components needed for AI will remain in short supply this year, supporting prices. “In addition, the tech sector should benefit from an improvement in PC and smartphone end markets. The industry could face headwinds from tariffs, but we do not believe this will outweigh the structural growth story over the medium term. We see the best opportunities in AI-linked semiconductors and US mega-caps.”
Meanwhile, although utility companies with high renewables exposure could face near-term pressures, “significant growth” in AI data centres will fuel power demand, leading to higher power prices, says UBS. “Roughly 20%–25% of the sector has material exposure to these trends. The sector’s defensive characteristics should also offer ballast to a portfolio in case economic growth concerns rise.”
Finally, UBS expects the financial sector to benefit from the coming US Federal Reserve rate cuts, which will lead to lower funding costs, higher loan growth and more capital market activity. Financial institutions in the US should also benefit from deregulation under Trump’s administration, adds UBS.
Freer financial sector
That said, UBS’s report was issued before the December 2024 Fed rate cut, when officials dialled back expectations to just two more cuts this year, fewer than previously forecast.
For context, Carmen Lee, head of OCBC Investment Research, expects banking analysts to start revising upwards their full-year earnings forecasts for Singapore’s three banks in January, after the holiday season. Fewer rate cuts mean banks’ net interest income could fall slower than expected, says Lee, while the sources of non-interest income that banks have been attempting to grow, such as fee income, could continue to bolster earnings this year.
The same could be said for US banks. In addition, Lazard’s Temple expects Trump to make “significant changes” to deregulate financial services in the US. Efforts to increase bank capital requirements and regulatory oversight of large banks under the Basel III endgame will likely be derailed, benefitting banks with over US$100 billion of assets, he writes.
“I also expect longstanding Republican antipathy toward the Consumer Financial Protection Bureau (CFPB) to culminate in a significant curtailment of its authority or even its outright elimination,” forecasts Temple.
The most significant regulations imposed by the CFPB relate to non-sufficient fund (NSF) charges on demand deposit accounts — or the penalties imposed when customers attempt to withdraw funds beyond those available in their accounts. More recently, the CFPB proposed limits on late fees for credit card payments.
“The NSF regulations reduced bank revenue by over US$5 billion per year and the credit card late fee proposals could reduce revenue by an additional US$4.5 billion per year,” notes Temple. Rolling back these measures could mean a bigger bonanza for US banks.
Watch the Magnificent Seven
For now, investors may be keen to know that five of the Magnificent Seven counters are trading below their consensus target prices. Nvidia ended 2024 at US$134.29, below the consensus estimate of US$172.80; Microsoft closed at US$421.50, below its US$508.55 fair value estimate; and Alphabet Class A shares ended the year at US$190.44, below its consensus target price of US$210.38.
In addition, Amazon.com closed at US$219.39, below its consensus target price of US$240.39, and Meta Platforms ended New Year’s Eve at US$581.51, below its consensus estimate of US$654.06.
On the other hand, Apple closed slightly above its US$250.42 target price, at US$246.85. Tesla is trading significantly above its US$283.88 consensus target price, having ended 2024 at US$403.84.
