What a Trump 2.0 presidency would mean for the stock market

• The return of Donald Trump as president is a scenario that investors are beginning to consider.
• Another trade war could be a headwind for stocks under a Trump 2.0 presidency, but it wouldn’t be enough to stop an AI bubble, according to Capital Economics.
• “We do think inflationary concerns would again push up Treasury yields, just from a different source — tariffs,” the firm said.

Investors are beginning to consider the potential stock market implications of a second Donald Trump presidency.

Trump has been ahead of President Joe Biden in various polls and betting markets, so a second Presidential term of Trump is not out of question.

According to a recent note from Capital Economics, a Trump 2.0 presidency would likely have a big impact on the top macro factors that investors are most concerned about: inflation, interest rates, and the US dollar.

All three of those would likely turn higher if Trump was elected as the 47th US President, and that would ultimately represent a headwind for stock prices.

“We don’t think there is much scope for Trump to repeat the fiscal expansion and tax breaks which boosted equities during his first term in office; instead, we think the policy most likely to move markets this time would be escalating the ‘trade war’ with China and potentially imposing universal tariffs on US imports,” Capital Economics’ market economist James Reilly said.

For his part, Trump said earlier this month that he would consider implementing a sky-high 60% tariff on Chinese goods if he were re-elected. That would be significantly more than the tariffs Trump implemented in 2018, and not only would it disrupt global trade, but it would likely undo a lot of the progress the Federal Reserve has made in combatting inflation.

“His tariff proposals would probably trigger a rebound in inflation which could persuade the FOMC to raise interest rates,” Reilly said. “So, while the source of the inflation impulse would be different (tariffs rather than concerns over expansionary fiscal policy), we think that win for Trump would once again push up Treasury yields.”

Additionally, Reilly said Trump’s potential tariffs would subtract up to 1.5% from US GDP and hurt corporate profits.

And this, combined with the fact that there would likely be little appetite in Congress for Trump to enact fiscal expansion programs like he did during his first Presidential term, the US dollar would move higher, which would represent another headwind for stock prices, since it would make exports more expensive.

“A Trump win might lead to the dollar staying stronger for longer, or rising significantly from here, if his tariff policies prompted the FOMC to shift back to tighter policy and/or set off a wider trade war that undermined global growth and spurred safe-haven demand for the greenback,” Reilly said. 

Despite the potential headwinds for stock prices under a Trump 2.0 Presidency, Capital Economics thinks the stock market would perform just fine, perhaps even incredibly well, because an AI hype bubble would outweigh all of those macro concerns.

“Our upbeat projections for the stock market in 2024 and 2025 are predicated on a view that hype over AI will continue to fuel a stock market bubble. We don’t think that the increase in risk-free discount rates or the hit to GDP would be big enough to burst this bubble,” Reilly said.

“So, we would be inclined to only slightly lower our S&P 500 forecast of 6,500 by end-25, if Trump won.”