The market outlook driven by Trump's campaign promises of tariffs, tax cuts, and deregulation, combined with a 25 basis point rate cut by the Federal Reserve, led to a surge in U.S. stocks last week. The S&P 500 index rose to 6000 points, a gain of 4.7%, marking the largest weekly increase in a year. The small-cap Russell 2000 index rose even higher by 8.6%. Expectations for economic growth and inflation resulting from potential Trump policies are intensifying, leading to increased capital flow into assets benefiting from the "inflation trade" theme.
Goldman Sachs analysts noted that in the current environment of reflation, cyclical assets and inflation themes have become the focal point for investment. Goldman strategists highlighted that global macro data and the results of the U.S. election have led to the strongest shift in inflation trades since 2000. Against this backdrop, gold and European bonds have become favored safe-haven assets. The Federal Reserve's rate cut policy, inflation expectations, and geopolitical risks lend gold significant safe-haven attributes, while the widening yield spread between U.S. and German bonds has increased the attractiveness of European bonds.
The performance of U.S. small-cap stocks has also been bolstered by Trump's proposed protectionist policies. These companies derive much of their revenue from domestic markets, and they are expected to benefit from new tariff policies. Additionally, Trump's plans to impose a 10%-20% tariff on imported goods and up to a 60% tariff on goods from certain Asian countries are further boosting expectations for the rise of small-cap stocks. The financial sector also emerges as a winner, with major financial companies' stock prices soaring, as the market anticipates Trump's relaxation of banking regulations imposed during the Biden administration, resulting in higher stock prices for banks like Citigroup, Goldman Sachs, and JPMorgan.
The Barclays analysis team believes that cyclical and small-cap stocks are poised for a wave of gains, as long as the Fed's rate cuts do not trigger a recession, these assets typically rebound steadily. Moreover, rising inflation expectations and a favorable economic growth outlook will create more room for market rotation. Goldman strategists also suggest that if real yields rise too quickly or bond yields increase excessively, stock market gains may be limited, yet the market currently holds optimistic expectations for the policies of the newly elected U.S. government.
As expectations around Trump's policies continue to ferment, market attention is focused on inflation, rotation trades, and the performance of cyclical assets. Investors are repositioning into small-cap stocks, cyclical stocks, and inflation-related themes to seize these policy-driven market opportunities.
