Will President Trump’s policies move markets?

This post was co-authored with my colleague Mike Ryan, Head of UBS Wealth Management Research Americas.

America’s 45th president was moving markets even before he took office. US equities rose in the first five weeks after Donald Trump’s election win. But while the new commander-in-chief has hit the ground running since his inauguration with a spate of executive actions, the most important changes of the administration’s legislative agenda will require more than just the stroke of a pen. So how might Trump’s policies impact investors over coming years?

Trump has outlined a packed policy agenda, with initiatives ranging from defense spending, corporate tax reform, regulatory relief, and an infrastructure build-out. With such an ambitious platform, compromises will need to be made and investors are already eager to see how the administration and Congress will add flesh to the bones of Trump’s campaign pledges. While the devil will be in the detail, we believe key policy initiatives could boost US GDP by 0.5% and add an incremental 5–15% to S&P 500 earnings per share over the next few years.

"A key investor focus will be tax reform."

A key investor focus will be tax reform, where Congress will need to strike a careful balance – lowering headline tax rates without causing an excessive rise in government deficit or disadvantaging certain industries. The proposal for a “repatriation tax holiday” could help by widening the domestic corporate tax base and helping pay for modest cuts to taxation rates. However, a lack of politically palatable options to generate revenue in other areas limits the opportunity for more significant measures. These challenges are the focus of our POTUS 45 report, The outlook for tax reform.

Regulatory relief, another flagship Trump issue, should be more straightforward. Trump has already proposed policies to trim red tape for companies. But repealing and replacing the Affordable Care Act (ACA), which has a major impact on companies and individuals, are still fraught with risk. Increased trepidation around the ACA’s replacement could result in significant economic fallout.

Boosting infrastructure and defense spending were popular aspects of Trump’s campaign, and we expect details to start emerging soon. Public-private infrastructure programs have enjoyed limited success thus far as businesses have been reluctant to get caught up in the ulterior agenda of many public officials. The new Administration could alter this dynamic to turn rhetoric into reality, by employing a “no strings attached” approach.

"The scope and scale of the proposals raise the risk of policy misstep or market disappointment."

The scope and scale of the proposals raise the risk of policy misstep or market disappointment. But ultimately this new policy paradigm should stimulate US economic growth and boost the performance of growth-sensitive financial assets. 

Our US equity sector positioning reflects the need to position for fundamental growth while considering the balance of policy risks and opportunities. For example, we are overweight on technology and healthcare, where repatriation can boost earnings; energy, which could benefit from immediate expensing for capital expenditures; and financials, where regulatory relief could provide a positive catalyst.

Bottom Line

The post-election market rally has not fully priced in the successful implementation of the Trump administration’s pro-growth policy prescriptions. These policies are poised to bolster the already-strong growth outlook, and add support to our preference for risk assets. We are tactically overweight on global equities, US equities, and Treasury Inflation-Protected Securities relative to US government bonds.

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