For investors, after Donald Trump announced his victory, the US stock market initially experienced a rapid rebound in risk appetite, but now investors are starting to wonder: who will be the next winner for the US stock market in the "Trump 2.0" era?
As a background, Trump made many promises during the campaign, such as high tariffs, tax cuts, business friendly deregulation, and comprehensive deportation of immigrants. For investors who flooded into the stock market last week speculating that Trump's policies would boost the economy, the challenge is to figure out which industries will receive a lasting boost.
For example, tariffs may reignite inflation, harm large multinational corporations, and potentially benefit domestic small cap stocks. Cracking down on immigration may increase labor costs and squeeze small businesses.
At the same time, a friendly stance towards increasing production of traditional energy sources may lower oil prices, and he will also attempt to reverse President Biden's policies aimed at helping the clean energy and electric vehicle industries.
I expect active investors to start using surgical knives to screen at the industry level, to see which companies and industries may benefit now, "said Eric Clark, portfolio manager at Accutest Global Advisors, an investment consulting firm." Over time, we will gain more data points about actual implementation and how it works
Clark said he has seized some opportunities. As banking, industrial, energy, and large tech stocks pushed up the stock market on Wednesday, he sold some tech and financial stocks. He also bought luxury retail and basic consumer goods stocks, which were in a loss making state when the stock market surged.
Who will benefit?
Small cap stocks rebounded last week and seem to be in a favorable position as traders assess possible policy backgrounds for the future. Most of these companies' revenue comes from domestic sources, and they will benefit from the rise of protectionism. And potential corporate tax cuts would also be helpful.
Trump proposes to impose comprehensive tariffs of 10% to 20% on imported goods, and up to 60% on Chinese made goods. The prospect of at least some tariffs being implemented has driven the Russell 2000 Index up 8.6% last week. Digital payment company Sezzle Inc. is one of the companies with the largest increase in the index, with its stock price doubling during this period.
Financial stocks are also seen as in a strong position, as Trump has promised to reform regulatory agencies that implement stricter banking rules under Biden's leadership. As Mike Mayo, a banking analyst at Wells Fargo&Co., has pointed out, a new era of deregulation may enhance Wall Street's profitability.
The stock prices of Citigroup Inc., Goldman Sachs Group Inc., and JPMorgan Chase&Co. soared after Trump's victory.
Venu Krishna, US equity strategist at Barclays, stated that the US stock market is eager to digest Trump's domestic growth policies through small cap stocks and hopes to enjoy the dividends of relaxed regulation by betting on financial and large tech stocks.
According to analysis, industrial and machinery companies such as Caterpillar Inc. are expected to benefit from domestic production of energy and mining commodities.
Stephen Volkmann, an analyst at US investment bank Jefferies, reiterated that Pioneer Heavy Industries is his first choice for the industry, partly due to the company's limited business in China.
He also said that American industrial and fastener distributors Fastenal Co. and American industrial supply company WW Grainger Inc. have a good record of shifting cost increases such as tariff hikes.
Finally, the prospect of cracking down on immigration is a potential adverse factor that investors are closely monitoring. However, there are also some companies that may benefit from it, such as private prison operators like CoreCivic Inc. and GEO Group Inc.
The future remains uncertain
At the same time, some people on Wall Street are skeptical about certain market trends after the election.
Considering Trump's pro oil stance, traditional energy stocks, including oil and gas companies, have seen significant gains since Trump's election. However, industry observers warn that efforts to relax regulations and allow for the extraction of more fossil fuels on public land may result in oversupply, thereby driving down prices.
As for Trump's tariff plan, Clark said that some consumer goods companies look very attractive because any tariff increase may not treat all companies equally.
I am not too worried about European luxury brands such as LVMH, Herm è s International, L'Oreal, Ferrari being subject to high tariffs, "he added.
For another industry that suffered heavy losses last week (clean energy and renewable energy), the situation is equally complex. The iShares Global Clean Energy ETF has experienced its worst week since March.
However, the prospects may not be as terrifying. Trump has stated that he intends to "halt" the Inflation Reduction Act, particularly the provision of a $7500 tax credit for electric vehicles. But analysts believe that the possibility of a complete halt is very small.
Mary Powell, CEO of Sunrun, the largest household solar company in the United States, stated last week that it is "highly unlikely" to completely repeal the Inflation Reduction Act and eliminate tax credits for industries such as photovoltaics.
"Americans want and need affordable and reliable energy, and the Inflation Reduction Act is actually promoting the economy of many states in the country, including many Republican leaning states," she said.
Christopher Dendrinos, an analyst at RBC Capital Markets, stated that the specter of this transformation will pose a threat to the industry as investors wait for clarity.
On the other hand, people expect policy changes to take a long time to pass, and even longer to implement, which weakens the overall impact and may change again after another government takes office, "he added.
Dendrinos said that other factors of Trump's policies may even help some stocks. This analyst expects that, given the protectionist agenda and strong domestic demand, First Solar Inc. and energy company Fluence Energy Inc. will perform better than their peers.