Trump set for historic second term

Financial markets have responded to the news that Donald Trump is on course to be elected US president with the US dollar posting its largest one day move in 2 years, while US bond yields and stock benchmark futures moved firmly higher. The moves came overnight on Tuesday as victory in the key swing states of Pennsylvania, Georgia and North Carolina saw a rush to the “Trump trade.”

In addition to the presidency the Republicans are expected to take control of the Senate after winning seats in West Virginia and Ohio, marking the first time in four years the party will have control of Congress’s upper chamber. Going into the election, the Democrats, including two independents, held the Senate majority 51-49. At the time of writing the House of Representatives remains too close to call but a victory for the Republicans would be significant as the trifecta would give significant power to implement policies with minimal opposition.

Plans to raise tariffs and cut taxes are seen as pushing up US inflation, leading to a potentially slower pace of interest rate cuts from the Federal Reserve. The dollar index, showing the currency against a basket of peers, rose 1.5% in response to be on track for its largest one-day gain since September 2022. The pound to US dollar rate fell just over 1% to trade around 1.29.

There were also sizable moves in the fixed interest space, with the 10-year Treasury yield hitting its highest level since July at 4.40%. There has been a strong move higher in the benchmark of late as an increased chance of a Trump victory, coupled with stronger economic data, has driven an 80 basis point (0.80%) move higher since mid-September. The 2-year Treasury yield —seen as more reflective of Federal Reserve monetary policy — has also moved firmly higher, rising to 4.3% overnight from a low of 3.5% in late September.

Stock markets are expected to open firmly in the green, with futures rising around 1.8% over night. The market is currently trading around its record highs in the pre-market after a small pullback in recent weeks. US small caps are outperforming, surging by as much as 6% overnight. A proposal to cut corporation taxes, whereas the Democrats were planning increases, is seen as positive in the near-term for corporate earnings. Some estimates have put these changes as a 4%-8% swing in earnings per share for US benchmarks.

Although the initial reaction has been positive, we continue to monitor developments closely. In particular, fiscal plans could see a substantial increase in the budget deficit and raise questions surrounding US creditworthiness. Trump also comes with an elevated level of unpredictability. We know from experience that what a candidate says on the campaign trail does not necessarily translate exactly to policy, and therefore the situation requires ongoing monitoring to accurately assess its impact.

Our analysts’ views

Chris Beckett, head of equity research, Quilter Cheviot:

“Future US regulation on nicotine companies, particularly BAT and Altria, will be watched closely. A lack of enforcement against Chinese vaping companies has been hampering their US businesses. BAT is the market leader in this space with the Vuse brand, while Altria purchased NJoy last year to get access to this market. Restricting Chinese imports or holding them to the same standards would be a big positive for BAT and Altria.

Most of these companies want a national adoption of Louisiana-type regulation, where government approval is required prior to selling a vape in order to crack down on cheap imports taking share. Trump taking a more aggressive line on Chinese imports gives the industry a better opportunity to get this.”

Mamta Valechha, consumer discretionary analyst at Quilter Cheviot:

Non-food retail

If tariffs lead to higher prices, this will likely pressure lower income groups and therefore would be a negative for quick service restaurants such as McDonalds and Starbucks. Mass deportation of migrants could squeeze the labour market adding to labour costs and inflation.

Also, a potential negative for Amazon’s ecommerce business if higher tariffs impact consumer spending, along with potential labour cost pressures in the retail operation. However, Amazon is probably better placed to manage these cost pressures than rest of retail, and with a greater likelihood of actions being taken against Temu, there will be positive offsets.

Luxury and Sportswear

We note the different supply chains and sales exposure between luxury and sportswear sectors, with the former having a majority European production base, and the latter sourcing from Asia, including China.

With regards to luxury, historically, a rally in US stock market and cryptocurrency has led to a positive wealth effect and in turn improved consumer sentiment. We also note, that LVMH Chairman and Chief Executive Bernard Arnault and Trump have a seemingly good relationship - in 2019, Trump inaugurated a new LV factory in Texas.

Given the luxury sector's pricing power, we would expect any tariffs to be passed on by brands to end consumers in the US, which may incentivise US consumers to shift more consumption offshore to Europe in order to take advantage of any potential regional price gap.

With regards to sportswear, which relies on China as a major production hub, Adidas  confirmed that it does not produce in China for the US and Puma noted that they are "well-positioned" to handle potential US tariffs. Nike on the other hand has an 18% exposure of its supply chain to China.

Autos

A Trump victory will likely be a negative for auto OEMS given policy stances on tariffs. Tariffs imposed on imports from China, Mexico and potentially Europe would be a negative for non-localised OEMs. Porsche, VW, Mercedes and BMW are the most exposed and to a lesser extent Stellantis. 

Tesla is least impacted given US cars are assembled in the US. Dismantling policies on green energy would benefit GM and Ford, and may allow them flexibility in powertrain investments and  less mix dilution over the period.

Tesla would also be a key beneficiary from higher China tariffs, potentially stopping cheaper Chinese EV players such as BYD and NIO, from flooding the US market. EV tax incentives will also likely to be trimmed. This would be negative for the EV industry,  but should give Tesla a clear competitive advantage because of its scale and vertical integration, giving it a cost advantage vs. legacy OEMs.

In recent weeks we have seen Elon Musk forging an alliance with Trump. He has been the biggest donor to the Republican party. Musk has been promised the role as head of a new Department of Government Efficiency, and has vowed to champion deregulation, and will gain influence over US policy on AI, space exploration and EVs – all which Musk has a direct interest in via Tesla and other ventures.

Leisure

The US asset-light operators such as Marriott are major beneficiaries from any reduction in corporate tax, while they are relatively insulated from higher inflation given franchise structure. On the negative side, China is an important market, so increased tariffs could harm prospects there, and any increase in yields would restrict new hotel construction, while a higher dollar has a negative translational impact on overseas earnings.

Maurizio Carulli, energy and materials analyst at Quilter Cheviot:

“The Trump victory should have a short-term benefit for US-based steel companies. The likely introduction of significant tariffs to imported steel would benefit local producers despite the structural headwinds affecting the sector. Both Cleveland-Cliffs and Acerinox - with its large manufacturing base in the US - are likely beneficiaries.”

Jarek Pominkiewicz, industrials analyst at Quilter Cheviot:

“To some extent the impact depends on whether we end up with a clean sweep by the Republicans or with a split Congress scenario.

In the former, there is an increased likelihood of significant policy changes, including the repeal of incentives for renewables and battery production, reduced regulation of oil & gas, as well as intensified/broadened tariff regime.

The last item, putting aside any possible negative sales impact from retaliatory actions and/or elevated supply chain complexity, would likely increase the cost of goods sold for US manufacturers. This, combined with a probable rising reshoring/friend-shoring trend to escape tariffs, would likely benefit automation players, such as Rockwell and Emerson.”

Nick Wood, head of fund research, Quilter Cheviot:

“Small and mid-cap stocks in the US are currently undervalued compared to mega caps. Pre-market indicators suggest that small caps are set to open much stronger than large caps, likely benefiting from Trump’s focus on domestic companies. My preference is for the Artemis US Smaller Companies fund, which has a strong long-term track record due to excellent stock selection and a focus on top-down factors.”