Potential Impact of a Second Trump Presidency on the Stock Market

Rumors of Donald Trump's potential return to presidency are stirring conversations amongst investors about how this could affect the stock market.

What Happened: Analysts from Capital Economics have voiced their concerns that a second term under Trump may cause significant shifts in inflation, interest rates, and the US dollar's strength, all of which can impact the stock market negatively.

Poll data and betting markets are pointing to the increasing likelihood of Trump outpacing current President Joe Biden, bringing the specter of a Trump comeback into sharper focus.

Capital Economics' market economist, James Reilly, predicts that Trump would likely intensify trade tensions with China by imposing broad tariffs on imports to the United States, a change from his first term's tax cuts and fiscal expansions which favored stock market growth.

Reilly specifically mentions, 'We don't think there is much scope for Trump to repeat the fiscal expansion and tax breaks which boosted equities during his first term in office; instead, we think the policy most likely to move markets this time would be escalating the trade war with China and potentially imposing universal tariffs on U.S. imports,' emphasizing the shift in Trump's potential economic policies.

A drastic proposal of 60% tariffs on Chinese goods, an increase from those imposed in 2018, could threaten global trade dynamics and could undermine efforts made by the Federal Reserve to control inflation.

According to Reilly, such aggressive tariff policies could trim up to 1.5% from the US GDP, negatively affecting corporate earnings. Additionally, an upswing in the US dollar value could create further challenges for the stock market by making US exports more expensive and less competitive internationally.

Despite these worries, Capital Economics suggests that other factors may buoy the stock market. An example given is the excitement surrounding artificial intelligence, which could overshadow macroeconomic issues, thus driving a strong stock market in the upcoming years.

Reilly states, 'So, we would be inclined to only slightly lower our S&P 500 forecast of 6,500 by end-25, if Trump won.' suggesting a somewhat moderated impact on long-term stock market forecasts.

Why It Matters: Market performance has historically been influenced by Trump's political moves, with investors betting on his potential return to the White House and closely monitoring his actions for implications on global markets.

Trump's return is also a source of concern for international businesses, with many Japanese firms viewing him as a business risk due to his protectionist policies. Such concerns are echoed by Chinese investors, who are wary of Trump's tough stance on trade that might lead to exceedingly high US tariffs on Chinese imports.

These apprehensions are also present among Goldman Sachs clients in Beijing and Shanghai, sensitive to Trump's previous support for removing China's 'most favored nation' trade status with the US, which could result in tariffs reaching above 40%.

Trump, StockMarket, Tariffs