Three Trends for Equities

Stocks just closed out one of their best presidential inauguration weeks ever. This shouldn’t come as much of a surprise because we knew going into the inauguration that President Trump has always been a businessman at heart and the performance of the stock market is important to him. As expected, he downplayed the risk of tariffs, and talked about tax cuts to ameliorate the worries the market had.

While there were a number of executive orders signed in the very first days, there still remains some confusion on how tariffs will be implemented, and the impact that lower immigration will have on the economy. We think lowering immigration could lead to a wage spiral to some extent, keeping core inflation sticky.

The extensive discussions on tax cuts mean that there will be less revenue coming into the Federal government, and this certainly needs to be balanced with some spending cuts. Absent spending cuts, we think that the long end of the US Treasury yield curve will continue to steepen, driven by inflationary pressures. This will continue to put some relative pressure on equities.

Spending cuts, however, are not positive for equities either. We know that the major reason equities rallied even in the face of the Fed’s aggressive rate hikes, has been the abundance of liquidity stemming from government spending.

This brings us to the Fed. We’re doubtful of a Fed cut this month, and after the recent meeting in December, it’s clear that the Fed is taking a more cautious approach to easing.

The question over the next few weeks will be: Can President Trump coerce the Fed into lowering interest rates, as he has proclaimed?

We don’t think that he can, or should.

The Fed has already cut rates by 100bps, and financial conditions have remained relatively easy. While we still don’t have clarity on many of Trump’s policies, we’re inclined to believe that there will be inflationary pressures stemming from lower immigration, and higher tariffs.

There is no clear picture of the resolution of the US Federal Government Debt levels, and absent a path to resolution we think that the long end of the US Treasury yield curve will continue to steepen, putting pressure on equities.

3 Trends for Stocks in the Next Quarter

As longer-term rates in the US continue to remain high, we may see some correction in US equities. Nevertheless, we think these dips could be bought because of three trends that could eventually support equities:

• Private spending may fill the gap of lower government spending, as business optimism has returned with Trump back in office
• Improvements in productivity are gradually making their way through the economy, in part due to the implementation of AI
• Improvements in company earnings are broadening out. While the Mag 7 continues to remain a significant contributor to the overall earnings growth picture, we’re gradually seeing a shift where the rest of the 493 companies in the S&P 500 are gaining earning traction. In fact, even the AI narrative is already broadening out beyond these 7 companies.

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