Trump’s Reelection Impact on S&P 500: Tax Cuts, Tariffs, and Dollar Index

Trump’s Reelection

The U.S. election has concluded. After all the media frenzy claiming we wouldn’t know the results for days due to the unprecedentedly close race, pollsters and the media are now left with little to say. The Economist, a weekly financial newspaper I like, rushed to announce on election day morning that Harris’s victory probability had increased from 50% to 56%, only to embarrass itself in the end.

In my opinion, Polymarket, where investors (more like speculators) bet directly with their money, reflected changing public sentiment most accurately throughout the election period. Media sometimes projects its political leanings onto polling intentionally or unintentionally. In contrast, Polymarket, motivated purely by financial gain, had a better grasp of reality.

Source: https://polymarket.com

Heightened Market Volatility

The dollar index, US 10-year treasury yield, and bitcoin all started surging as Trump’s win in the presidential election became apparent.

The EUR weakened against the USD, dropping from 1.0934 at the close on November 6 to 1.0731 at the open on November 7. Meanwhile, the US 10-year Treasury yield rose by 14.3 basis points, from 4.289% at the close on November 5 to 4.432% at the open on November 6.

Bitcoin trades 24/7, allowing it to reflect market events more quickly than financial products limited to regular market hours.. Bitcoin’s open price was 67,811.17 on the election day (Nov 5, 2024) and it closed at 75,639.08 on the following day (Nov 6, 2024), an 11.5% increase.

Source: Reuters.com

Trump Presidency: Dollar Index

Two key economic policies shaped Trump's first term: significant tax cuts and tariffs on China. It’s likely these same policies—tax cuts and tariffs—will be revisited in his second term. With a red sweep where Republicans control the presidency, Senate, and House, Trump's pledges are likely to move forward without resistance.

Yesterday, we saw a coordinated jump in the Dollar Index and US 10-year Treasury yield, a scenario reminiscent of Trump's first election in 2016. However, it’s worth examining more closely.

The chart below shows that after Trump’s election win in November 2016, the Dollar Index initially surged but then declined throughout his first year in office, starting just before his January 2017 inauguration. As Trump’s tariff policies took shape, the dollar rebounded, entering a two-year upward cycle that continued until the onset of COVID-19 in 2020.

Source: Bloomberg.com

We could see a similar pattern this time. During his first term, Trump pressured the Federal Reserve to cut rates. It’s likely that Trump will push for more rate cuts again this time. Hence, the 10-year yield might hit a ceiling at some point and give back some of its gains.

With U.S. Treasury yields rising, the dollar is likely to strengthen as well. But the market may eventually realize that, while Trump advocates for a strong dollar, he actually favors a weaker dollar to boost exports given his focus on reducing trade deficits. Whether this market shift happens before his inauguration, as in his first term, or later remains uncertain. Another key factor will be when Trump’s proposed tariff hikes are implemented. If tariffs are raised sooner and more aggressively than in his first term, as campaigned, the dollar might not decline easily and could even climb higher.

Trump Presidency: Tax Cuts and S&P 500

The chart below shows that after the corporate tax cut bill was passed during Trump’s first term, the S&P 500 index surged by 35% in just two months. The U.S. stock market began rising even before the bill's passage as the likelihood of its approval in Congress increased. Considering that, the  actual total increase in stock prices thanks to the tax cut was even greater than 35%.

Source: https://realinvestmentadvice.com

Coming back to the present, Bank of America (BOA) estimates that if the corporate tax rate is lowered from the current 21% to a maximum of 15% as per Trump’s pledges, S&P 500 companies’ earnings per share (EPS) will increase by about 4%. However, since the 15% rate may apply only to companies that produce domestically and hire U.S. workers in accordance with Trump’s campaign promises, the effective average tax rate may be higher than 15%. Therefore, the expected EPS growth is likely to be somewhere below 4%, while that is still significant upside.

Trump Presidency: Tariff and S&P 500

Let’s look at BOA projections. They assumed a 60% tariff on China and a general 10% tariff on other countries. But Trump later suggested raising the general tariff to 20%, making the estimates below conservative. Furthermore, these projections assumed that price increases due to tariffs won’t affect sales, which is optimistic.

Source: BOA Global Research

I added the blue and red boxes. The number (3.9%) in the blue box represents the anticipated decline in S&P 500 companies' net earnings if (i) none of the price increase due to tariffs is passed on to consumers, and (ii) U.S. companies' revenue from China remains unchanged. The red box, on the other hand, shows the result when we assume that companies pass on about 40–60% of the price increase to consumers and that revenue from China drops by around 3–4%. The average impact here is 3.1%. However, I believe that if price increases reduce consumption, net earnings may decline further. Additionally, if a universal 20% tariff is imposed on all countries, the negative impact could be much larger.

Closing Remarks

Yesterday, all three major stock indexes surged, driven by reduced uncertainty following a surprisingly swift and decisive election result. Moving forward, the key factor will likely be which policy—tariff increases or corporate tax cuts—gets implemented first and attracts the most market focus.

Despite the stock market’s very positive reaction to the red sweep and the expectation of tax cuts and deregulation, a large tariff increase could dampen market enthusiasm later. The EPS boost from tax cuts could be offset by the negative effects of higher tariffs. The uncertainty surrounding tariff hikes, compared to the more certain tax cuts, may be the key factor in determining whether S&P 500 profits rise or fall as a result of these two major economic policies.

Additionally, although not covered in this article, large-scale illegal immigration deportation policies could also emerge as a significant variable, potentially straining the U.S. economy and inflation. It remains to be seen if these policies will be enacted as promised.

Though Trump will officially be inaugurated as the 47th president on January 20th, financial markets have already reacted as if his second term has begun. Investors should prepare for heightened volatility that is likely to come.

Thanks for reading. I wish you to grow rich slowly and surely!

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