US stocks have looked sluggish at times over the past several weeks as rising rates and debate over whether the Federal Reserve will cut interest rates in 2025 sent the S&P 500 (^GSPC) to its lowest levels since the election.
But a better-than-expected inflation reading on Wednesday helped US markets perk up, and Bank of America investment strategist Michael Hartnett believes further downside in the S&P 500 will be “protected” by President-elect Donald Trump in the months ahead.
During his first term as president, Trump viewed the stock market as a barometer for his own administration’s success. Expectations from many investors are that Trump will remain sensitive to a pullback in US stocks during his upcoming turn.
And while tariffs are a concern for investors and corporations, other Trump policies may be a positive for the stock market.
Deregulation has been seen as a boon for banks and could encourage more dealmaking after a challenging few years. A more crypto-friendly administration has sent that pocket of the market soaring, and lower corporate tax rates could help corporate profits across industries. Trump’s “America First” mantra has also boosted optimism among small businesses and could be seen as a tailwind for small-cap companies too.
Hartnett cautioned, however, that other factors like the market’s high valuation and concentration seen in the index — with just 10 stocks making up nearly 40% of the index — likely also put a cap on upside for the S&P 500.
And a question remains whether rallies across certain “Trump trades” like small caps, energy stocks, and financials will hold after taking off following the election only to retrace most of their gains leading into the inauguration.
Hartnett added that if Trump 2.0 and a fall in rates can’t send the small-cap Russell 2000 (^RUT) index sustainably above its 2021 high, asset allocators are likely to reduce their overweight positioning in stocks.
Broadly, strategists agree that Trump’s policies could still be a tailwind for the US equity market but don’t believe those gains are going to come in a straight line.
“January volatility prior to Trump’s 1/20 Inauguration reinforces the core view of a more volatile year ahead,” Julian Emanuel, who leads the equity, derivatives, and quantitative strategy team at Evercore ISI, wrote in a note to clients on Thursday night.
Emanuel, who sees the S&P 500 finishing 2025 at 6,800, or about 13% higher than current levels, still argues Trump’s administration will bring a continued swing between “risk on” and “risk off” sentiment among investors.
