Trump stock rally may not be what it seems

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Is the Trump trade rally really a thing?

Stocks have been on a tear since Donald Trump claimed victory in the United States election last week. The S&P 500 posted its best week in a year, gaining 4.7 per cent and crossing the symbolic threshold of 6,000 for the first time.

“The Trump electoral victory has unleashed a wave of speculative investor behavior that makes a mockery of even the moves we saw after his November 2016 win, which actually did come as a surprise,” wrote David Rosenberg of Rosenberg Research & Associates Inc. in his note this morning.

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“Even with far more bloated valuations, the surge in the stock market in the first week after the vote has far more than doubled what we saw in a similar short time frame eight years ago.”

The euphoria reached a fever pitch Monday with one strategist predicting the “animal spirits” unleashed by Trump’s policies would send the S&P 500 to 10,000 by the end of the decade.

Ed Yardeni lifted his targets to 6,100 for this year, 7,000 for 2025 and 8,000 for 2026, Bloomberg reports.

“Stock investors are also thrilled by the regime change to a more pro-business administration promoting tax cuts and deregulation,” Yardeni wrote in a note Monday.

“Animal spirits are back.”

And investors appear to be jumping on that bandwagon. Exposure to U.S. stocks leapt to the highest since 2013 after the election, with the share of fund managers overweight in U.S. stocks almost tripling, according to a Bank of America survey.

Others question the ‘Trump is good for stocks’ narrative.

Hubert de Barochez, senior market economist at Capital Economics, also sees big gains for markets ahead, but not because Trump is in the White House.

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Capital believes that Trump’s polices will actually be a headwind for equities as his second term “proves to be neither ‘pro-growth’ nor ‘pro-business.’”

Trump can deliver the tariffs and immigration curbs by executive action, but these will weigh on companies’ profits and prospects, said de Barochez.

And the economists doubt he will be able to deliver the tax cuts he has promised, hopes of which are a key driver in the market rally.

Capital has been bullish on stocks for a while and expects the S&P 500 to continue to make strong gains, hitting 7,000 by the end of 2025 — but their forecast has nothing to do with the new president and everything to do with artificial intelligence.

“Our bullish forecast for equities rests on our view that AI-enthusiasm will grow further and outweigh any headwind from Trump’s policies,” wrote de Barochez.

But here’s the twist. Capital believes that when the S&P 500 does hit 7,000 on “AI hype” it will have reached the point where the bubble bursts.

“The upshot is that we expect Trump’s second term to be associated with very poor returns from U.S. equities, although only partly reflecting the policies his administration delivers,” wrote de Barochez.

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One of the things that stood out in a recent release of provincial gross domestic product numbers is how economies across the country are marching in lockstep. The gap between the strongest provincial growth and the weakest was 1.7 percentage points in 2023, the smallest in at least 30 years, said Robert Kavcic, senior economist at BMO Capital Markets. Since 1994, the average gap has been 5 percentage points.

“Unlike past environments where resource booms/busts have driven major wedges in growth performance across Canada, this environment is very uniform,” said Kavcic. “All provinces have been dealing with similar issues to some extent — inflation, interest rates and very strong population growth.”

Newfoundland & Labrador is the exception, but its GDP tends to swing significantly on temporary production shutdowns, he said.

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McLister on mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his mortgage rate page for Canada’s lowest national mortgage rates, updated daily.

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Financial Post on YouTube

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Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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