One week / one topic: The Trump factor

What happened?

After ‘winning’ the presidential debate and surviving an assassination attempt, Donald Trump is now the clear favourite for the upcoming US elections - also as Joe Biden just dropped out of the race.

Based on recent price moves, markets think that a second Trump presidency would bring:

1. Higher spending + lower taxes = larger and larger fiscal deficits -> Higher yields and steeper curve (US 2s10s spread, white)

2. Tariff wars and ‘artificially’ lower US interest rates -> Lower Dollar (EURUSD, blue)

3. Focus on blue collar and domestic growth vs ‘globalist’ Big Tech -> Small cap outperformance (Russell 2000 vs Nasdaq 100, orange)

While first-order effects might indeed point in this direction, two key considerations stand against rushing to conclusions:

• Markets often run ahead of themselves, and – despite the undeniable Trump momentum – the election is still far from a done deal (see below from fivehtirtyeight.com)

• In 2016, markets reacted to a Trump victory very differently vs expectations. Buyers of ‘Trump trades’ beware…

So, how should investors prepare for a more-likely-than-before Trump victory? Is it even possible to do so?

Our observations

• Fundamentals: Regardless of who wins, the US is expected to keep running a ~7% deficit for the next decade – debt levels be damned. This is unprecedented in peacetime, and – under these conditions – the likelihood of an economic contraction should be lower than otherwise.

• Price action: Recent political developments provided a clean narrative to back price moves which were perhaps ‘already in the works’, given extreme positioning. That said, the main question here remains: are we done yet, or is there (much) more to come?

• Investor beliefs: In the era of TikTok, 100 days left are going to feel like a very long time. New narratives will emerge following the inevitable twists and turns. While it still feels premature to position, opportunities could certainly arise between now and November 5th.

So what?

Of the recent price moves highlighted above, the sector rotation within Equities is the one that has caught our attention the most. (see also last week’s newsletter)

Big Tech have not reported result yet, and – while their earnings growth is expected to slow – the rotation might have a lot of room to run should their results significantly lag the rest of the market.

Importantly, after a torrid run of Tech outperformance, we can also observe increasing doubts about the potential of AI to truly transform the world and generate profits at the same time.

In terms of positioning, we remain broadly constructive – even after recently closing our Chinese equities position – yet we think there is an increasing potential for a shift away from Tech leadership.

Furthermore – especially after Trump picked JD Vance as VP candidate – both Republicans and Democrats seem to be addressing (at least verbally) a huge, obvious problem facing the US: way too many full-time workers don’t earn enough to raise a family.

As Republicans increasingly abandon their traditional advocacy for (the myth of) trickle-down economics and Democrats are also veering towards hard-left policies like rent control and debt forgiveness, who’s gonna be left to advocate for shareholders?

Putting it all together, it feels like the bar is quite high for Big Tech to convince investors to disregard all of the above.

Yet – given their stellar track record of earnings growth – counting out these giants still feels quite premature.