The recent victory of Donald Trump in the election is expected to lead to a significant rally in U.S. equities.
Analysts from UBS Asset Management (UBS AM) believe that the anticipated benefits of lower taxes and reduced regulations will boost U.S. stocks, particularly small-cap companies that are more focused on the domestic market. This shift in the political landscape has already resulted in an increase in equity prices, while bond markets have reacted negatively in the short term.
UBS AM's Multi-Asset Strategy team, led by Evan Brown, has observed a sharp rise in U.S. equities, with the small-cap sector being the primary beneficiary. Deregulation under Trump's administration is expected to favor regional banks and other domestic enterprises. On the other hand, international markets, especially China, are facing challenges due to potential tariff threats, which have led to a decline in their equity performance.
UBS AM predicts a decrease in equity volatility and a traditional year-end rally in U.S. stocks. The yield on 10-year U.S. government bonds has risen, and the dollar has strengthened against major trading partners. The euro, Mexican peso, and Chinese renminbi have all seen significant declines. UBS AM remains optimistic about the outlook for U.S. equities, citing a robust economic framework and continued monetary easing. However, they maintain a cautious stance on European equities due to weak growth and increasing political uncertainty.
Emerging market equities are at a crossroads, balancing potential economic stimulus from China with the risks posed by tariffs. While there is optimism regarding earnings prospects, the threat of duties could dampen growth. UBS AM advises investors to focus on the macroeconomic outlook, where disinflation trends may lead to further cuts in Federal Reserve interest rates. However, the strength of the dollar is expected to persist.
UBS AM cautions that the performance of U.S. stocks following Trump's victory in 2016-2017 is unlikely to be replicated due to higher valuations, a more precarious fiscal situation, and the incremental benefits of tax cuts. Trump's aggressive stance on tariffs and immigration could introduce negative supply shocks, potentially stifling growth and fueling inflation. Investors are eagerly awaiting further details on Trump's policy agenda, which is expected to emerge in 2025.
The Federal Open Market Committee (FOMC) is widely anticipated to implement another rate cut, signaling a trend toward disinflation. This shift in monetary policy could provide additional support for U.S. equities. The measures to be taken by the Chinese Congress will also play a crucial role in determining the trajectory of Chinese assets and emerging market equities.
As the global economic landscape continues to evolve, investors are advised to stay informed and vigilant, as both domestic and international factors will significantly influence market dynamics in the coming months.