Investors Rethink Economic Implications of Trump's Return

Investors may be misjudging the economic implications of Donald Trump’s return to the presidency, BCA Research notes, urging a reconsideration of the “Trump trade” narrative.

In a recent report, the investment research firm suggests that market expectations for a repeat of the growth and policies seen during Trump's first term are misplaced.

Market sentiment is currently buoyant, with the S&P 500 reaching new highs and investors shifting towards small caps and riskier assets. According to BCA, this optimism is rooted in the belief that Trump will enact a similar set of growth-oriented policies, potentially triggering another economic boom.

However, BCA emphasizes that while the president may be the same, “the macro backdrop and political situation today are starkly different from 2016.”

Current Economic Landscape

The current economic landscape contrasts sharply with Trump's first term. In 2016, inflation was rising, and the Federal Reserve was entering a rate-hiking cycle.

Today, inflation is on a downward trend, the Fed is easing rates, and economic indicators are reflecting a slowing labor market and declining global manufacturing activity.

“Not only are the macro backdrop and political situation different, but they are pointing in the complete opposite direction to eight years ago,” the note states.

Political Feasibility of Fiscal Stimulus

BCA raises questions about the political feasibility of significant fiscal stimulus. While Trump’s initial tax cuts in 2017 were credited with boosting growth, analyses suggest their impact on investment was limited.

“It is not the level but the change in the deficits that matters for growth,” the report writes.

“The deficits are already very large, which means that a substantial increase from current levels is unlikely. Projections for fiscal thrust are negative for next year,” it adds.

BCA strategists believe investors betting on a repeat of 2017 are overlooking Trump’s current priorities. Inflation, rather than growth, is now the key political issue.

High inflation during Biden’s term dominated voter concerns in 2024, and strategists predict Trump is unlikely to implement policies that might intensify price pressures. The establishment of the Department of Government Efficiency (DOGE), led by Elon Musk and Vivek Ramaswamy, indicates a more conservative fiscal approach.

Investment Implications

From an investment perspective, BCA characterizes small caps, often viewed as beneficiaries of fiscal stimulus, as “extremely levered,” making them susceptible to rising borrowing costs.

The recent momentum of the dollar is also a concern, leading BCA to reduce its exposure to the currency.

Overall, the firm views risk assets as “overextended” and remains underweight in equities while positioning defensively.