A screen displays Republican presidential nominee Donald Trump, after he became U.S. president-elect, at the end of the New York Stock Exchange trading day, in New York City, U.S., November 6, 2024. REUTERS/Andrew Kelly/File Photo

U.S. Stock Rally Falters Amid Concerns Over Trump’s Policies and Rising Yields

The rally in U.S. equities fueled by President-elect Donald Trump’s election victory has shown signs of slowing, with the S&P 500 falling 2% last week. Concerns about inflation, rising bond yields, and uncertainty surrounding Trump’s policies are weighing on investor sentiment despite the index’s substantial year-to-date gain of 23%.

Inflation and Rising Yields

The Role of Bond Yields

A key driver of market unease is the sharp rise in U.S. Treasury yields. The benchmark 10-year yield climbed to its highest level in over five months, reaching 4.5% on Friday before settling slightly lower. Rising yields can dampen stock market performance by increasing borrowing costs for companies and consumers while providing a more attractive alternative to equities for investors.

The yield increase reflects diminished expectations of further Federal Reserve interest rate cuts as investors anticipate stronger growth under Trump’s policies. However, many of those policies, including tax cuts and tariffs, are seen as inflationary, potentially prolonging the upward trend in yields.

“If yields continue to trend up and they don’t find their ceiling, I think it will become a problem because it will translate into a tighter monetary environment,” said Irene Tunkel, chief U.S. equity strategist at BCA Research.

Fed Chair Jerome Powell’s recent comments reinforced this perspective, with Powell signaling little urgency to cut rates despite solid economic growth and inflation above the 2% target.

Equities and Risk Premium

As yields rise, the relative appeal of equities diminishes. The equity risk premium, which measures the earnings yield of the S&P 500 relative to the 10-year Treasury yield, is now at its lowest level since mid-2002, according to Keith Lerner, co-chief investment officer at Truist Advisory Services.

Policy Uncertainty and Market Impact

Uncertainty over Trump’s economic agenda has further unsettled markets. While optimism over fiscal stimulus and deregulation initially boosted equities, the lack of clarity on key policies has introduced volatility.

Impact on Specific Sectors

• Pharmaceuticals: Shares of Pfizer and Moderna fell after Trump named vaccine skeptic Robert F. Kennedy Jr. to lead the Department of Health and Human Services.
• Government Contractors: Stocks like Leidos Holdings and General Dynamics declined due to concerns over a new government efficiency initiative to be led by Tesla CEO Elon Musk.
• Tesla and Bitcoin Gains: Despite broader market concerns, Tesla shares rose 28% since Election Day, driven by expectations of Musk’s influence in the administration. Bitcoin has also surged over 30%, buoyed by hopes for cryptocurrency deregulation.

Economic Growth Projections

Strategists at BofA Global Research highlighted the risks to their 2.3% economic growth forecast for 2024. Growth could exceed 3% if Trump’s administration prioritizes fiscal easing and deregulation. Conversely, a focus on protectionist trade policies, including tariffs, could trigger a trade war, potentially pushing the economy into recession.

Historical Trends and Optimism

Despite these challenges, there are reasons for optimism. Historically, the S&P 500 has performed well in the final months of presidential election years, averaging a 3.3% gain in November and December since 1952. Strong corporate earnings and a solid economic backdrop also provide a foundation for potential market resilience.

Ross Mayfield, an investment strategist at Baird Private Wealth Management, noted, “There is a lot else working for the market,” suggesting that equities could stabilize in the months ahead.