Trump’s Economic Policies and Fed Moves: Insights from Sam Stovall

Welcome back to Wall Street Frontline.

Following Donald Trump's election victory, financial markets have experienced a significant rally. The stock market is up, the dollar has surged, and the treasury yields have jumped. These movements suggest that investors are anticipating a return to Trump's well-known economic policies, like tax cuts and deregulation, which are expected to drive economic growth but also raise concerns about inflation and budget deficits.

Adding to the financial landscape, the Federal Reserve has just announced a 25-basis point rate cut, aiming to support the economy amid ongoing uncertainties. This rate cut could have widespread implications, further impacting market sentiment and economic expectations.

Today, we are joined by Sam Stowell, Chief Investment Strategist at CFRA Research, to provide insight into how these shifts may impact the financial landscape and broader economy.

Wall Street Frontline: How do you interpret the market's initial reaction to Trump's victory, especially with the significant movements in equities, the dollar, and treasury yields?

Sam Stovall: I think my first impression was that the market really did not expect a Trump victory. And as a result, they had been positioned to a point where either they were neutral or they were anticipating a Harris victory. And so when it became evident that that was not the case, they pretty much had to reverse course. I think the reasons that we had sectors like financials do so well is because of the expectation of a lifting of regulations on the banks. The reason, however, that we saw utilities and REITs do poorly is because the prospect of tax cuts causing the yield on the 10-year note to rise as investors worry that there be that much more debt that the government would have to contend with. So higher yielding assets now have even greater competition from bonds.

Wall Street Frontline: Given the rally in fossil fuel energy companies, banks and other sectors likely to benefit from Trump's administration, do you see any sectors that could underperform under his new policies?

Sam Stovall: Well, I think the areas where we could see some challenges, if he does go ahead with raising of tariffs with many of our international trading partners, that could put a pressure on the larger cap companies, especially those that have hefty global trading activity. So those multinationals could see a lot of pressure. The electric vehicle companies will not be getting the kind of support that they would have from the Democratic side. So I would tend to also say that because Trump policies are more business friendly, we'll see more interest in the growth sectors like industrials, financials, technology. And as a result, investors will be gravitating away from the very defensive areas like consumer staples, health care and possibly utilities.

Wall Street Frontline: Do you foresee corporate earnings remaining strong in light of potential tax cuts or could higher costs from tariffs and inflation pressures erode profit margins?

Sam Stovall: Well, that's a very good question because it's really unknown at this point. Expectations are for about a 13 percent rise in corporate profits in 2025 as well as in 2026. But that could be eroded if we do end up having very high tariffs placed on our foreign trading partners, because it's not going to be simply a one-way street, that they will then start to increase the tariffs that we will have to pay for our exports. So that could not be a good thing. And right now, with valuations relatively high for the S&P 500 and many of its sectors, that could end up being a pretty hefty headwind that it would have to contend with.

Wall Street Frontline: Given the Federal Reserve's recent decision to cut rates and the possibility of more inflation pressures from Trump's policies, how do you anticipate the Federal Reserve's approach to future rate cuts or adjustments?

Sam Stovall: Well, I don't think that their approach will be any different. They will still remain very data dependent. We do expect them to cut interest rates in December. We think they could pause in January and move more toward a cut every quarter, not a cut every meeting. So we'll end up with possibly 100 basis points of reductions in 2025. But of course, if we find that the threat of tariffs is more than simply a bargaining ploy, then yeah, the Fed might end up being slower to lower interest rates because of the worry that inflation itself is not coming down as quickly as had been anticipated.

Wall Street Frontline: What is your short-term outlook for the stock market? Given Trump's focus on domestic economic policies, do you expect small-cap stocks to outperform large-cap stocks in the near future?

Sam Stovall: Well, certainly the small-cap stocks are more attractively valued than the large-cap issues. Right now, the S&P 500 is trading at close to a 40% premium to its average forward P/E ratio over the last 25 years. However, the mid and small-cap stocks are trading at between a 25% and 30% discount to their relative P/E ratio averages. So compared with the S&P 500, they look very attractive. And if we find that tariffs are a reality, then I think investors are going to gravitate toward those non-multinational companies, the smaller firms where their marketplaces are more domestic rather than international. So I think that small-caps do have good growth potential. For the rest of this year, I don't think that the large-caps are going to have a problem. Historically, a red wave has been the most favorable for a Republican president with the stock market. Annual gains have averaged about 13% since World War II under a red wave versus a split government being the best scenario for a Democratic president.

The long-term outlook, we are preparing our 2025 forecast, but historically, the third year of a bull market tends to be a little challenging. There have been 11 bull markets that celebrated their second birthday since World War II. Three of them did not celebrate their third because they fell into a new bear market before the 12-month period was out. Two more posted declines. Three were below average returns. So only three of the 11 posted double-digit gains. So I would say to investors, don't expect a third year successively of double-digit increases, more likely something in the area of 5% to 8%.