As the odds of a Donald Trump return to the Oval Office rise following the first presidential debate, investors are starting to consider the potential impact of a Trump 2.0 presidency on the economy and the stock market. Even before the debate, Trump was already ahead of Biden in various polls and betting markets, indicating a strong possibility of a second term for the former President.
According to a recent note from Capital Economics, a Trump 2.0 presidency would likely have a significant impact on key macro factors that investors are concerned about, including inflation, interest rates, and the US dollar. If Trump were to be re-elected, all three of these factors would likely trend higher, presenting a headwind for stock prices.
One of the major concerns under a Trump 2.0 presidency would be the escalation of the trade war with China and the potential imposition of universal tariffs on US imports. Trump has previously mentioned considering a sky-high 60% tariff on Chinese goods if re-elected, which could disrupt global trade and lead to a rebound in inflation. This inflationary pressure could prompt the Federal Reserve to raise interest rates, impacting Treasury yields and potentially hurting stock prices.
In addition to the impact on inflation and interest rates, Trump’s proposed tariffs could also subtract up to 1.5% from US GDP and negatively affect corporate profits. With little appetite in Congress for fiscal expansion programs, the US dollar would likely strengthen under a Trump 2.0 presidency, making exports more expensive and further challenging stock prices.
Despite these potential headwinds for stock prices, Capital Economics believes that the stock market could still perform well under a Trump 2.0 presidency due to the hype surrounding artificial intelligence (AI). The firm predicts that an AI bubble would outweigh the macroeconomic concerns, leading to a positive outlook for the stock market in 2024 and 2025.
Overall, while a Trump return to the Oval Office could bring about challenges such as higher inflation, interest rates, and a stronger US dollar, the stock market may still thrive due to the ongoing AI hype bubble. Investors will need to closely monitor the evolving political landscape and its potential impact on the economy and stock market in the coming years.