Now what?

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   By Guest Blogger Ryan Lewenza

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The focus over the last few months has been on the important US election, and the results are in – Donald J. Trump won in a landslide victory, becoming the 47th President of the United States. An historic political feat after losing in 2020 to President Joe Biden. His win is historic in many ways. He’s the first elected President with a criminal conviction. He is only one of two Presidents who won two non-consecutive terms (Glover Cleveland is the other who served as the country’s 22nd and 24th President in the late 1800s). And, at 78, is the oldest person ever elected as US President. Historic indeed!

Now the focus will turn to what policies will he enact and the implications of his policies for the US economy and markets. During the campaign he threw out a lot of proposals to help gin up support, including no taxes on tips, social security and overtime, a cut to the corporate tax rate from 21% to 15% for those companies that make their products in the US, the deportation of illegal immigrants and tariffs of 10% on all goods coming into the US and 60% on Chinese imports.

President-elect Trump made tariffs a central aspect of his previous administration and is likely to continue this in his second term. He recently spoke at an economic forum and said, ‘tariffs’ is “the most beautiful word in the dictionary,” so we need to take him seriously on this front. His tariff ideology and proposals concern us because this could launch a global tariff war, which ultimately could boost prices and ignite inflation. This, in turn, could force the Federal Reserve (Fed) and other central banks to reverse their recent interest rate cuts, and begin hiking rates in the coming years. We’ll be monitoring this closely as it has potentially huge implications for the global economy and financial markets.

But one policy that for sure would be positive for the stock market is his proposed cut to corporate tax rates to 15%. A lower tax rate would flow right to the bottom line of US corporations, boosting profits. Higher earnings generally translate to higher stock prices.

Below is shown the relationship between the S&P 500 and its underlying earnings and note the very high correlation of 0.96. Over the long run, where earnings go so do stock prices. Therefore, a Trump corporate tax cut would be positive for the US stock market (not so for the US budget and deficits, which stand at historic highs).

Currently, analysts are forecasting S&P 500 earnings to rise 13% yoy to US$275/share next year, but this is based on current tax rates of 21%. If tax rates were to be cut next year, then this could boost US earnings even more. We view this as a big positive for 2025.

S&P 500 is highly correlated with earnings

Source: Bloomberg, Turner Investments

Another big positive we see for the US economy and stock market are additional rate cuts. The Fed started this easing cycle in September with a large 0.50% cut. Then, in November, it cut the overnight rate by another 0.25% while forecasting more cuts into 2025. Interest rate cuts are designed to help spur the economy by encouraging more spending and investing, and could help the moribund US and Canadian real estate markets.

As seen below, the stock market has a strong tendency to rise when the Fed is cutting rates with a median return of 14% in the 12 months after the first Fed cut. There are exceptions but those were during periods of deep economic contraction like 2008, for example.

The US has one of the lowest unemployment rates in decades and their economy grew at 2.8% in the last quarter. Given this, we don’t foresee the US economy falling into a recession in the coming year and therefore see the Fed rate cuts as a big positive for stocks heading into 2025.

Returns in the S&P 500 after fed fate cuts

Source: Dynamic Strategy

Finally, we’ve fielded some concerned emails and questions from clients about the implications of a Trump win for the stock market and our own economy.

First, some of Trump’s policies, if enacted, would be bullish for the stock market, such as the corporate tax cuts and cuts to regulations. We would add that the US markets did very well during his first administration, with the S&P 500 up over 60%. He also views the stock market as a barometer of his success, so net-net, the Trump win could be just fine for the stock market. Provided his tariffs don’t ignite inflation.

As of the writing of this report, we’re still waiting for the final vote results for the US congress, but it appears likely we could have a full sweep with Republicans controlling all branches of the US government. Historically, this has been good for the US stock market with the S&P 500 up 11.7% annualized, over the four-year term. This is better than when you have a Republican president and Democratic house, which saw the stock market up on average 1.04% annualized. This is another potential positive from the election results.

S&P 500 returns under different political scenarios

Source: Turner Investments

With respect to the Canadian economy, a 10% across-the-board tariff would clearly be negative for our economy. 75% of our exports go to the US, so a tariff, if enacted, would result in an economic hit to Canada. Also, the Canada-United States-Mexico Agreement comes up for review in 2026, and Trump has vowed to renegotiate. Our views on this are: 1) US and Canada already dealt with a lot of issues in the last round of renegotiations, so there could be less focus on Canada from the US’s perspective; and 2) Trump appears more focused on China than close allies like Canada. So, while the Trump win could have some ramifications for Canada and our economic growth, we think the impact will be minimal in the coming years.

While Trump may say some outlandish and at times scary things, we shouldn’t jump to conclusions and assume this will be bad for the economy, markets and your portfolio. We’ll monitor things closely, especially on the inflation front once Trump moves back into the White House, but our initial assessment is that the Trump win could actually help the US stock market heading into 2025.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.

Source: https://www.greaterfool.ca/2024/11/16/now-what-11/