President-elect Donald Trump’s victory in the 2024 election has propelled the US stock market to record highs. This surge in stock market performance has been met with enthusiasm from equity investors who are optimistic about the potential impact of Trump’s proposed policies on corporate earnings growth. However, the post-election rally may not be without its risks.
Morgan Stanley has identified three key factors that could disrupt the ongoing Trump trade and impact market momentum. One significant risk highlighted by the firm is a sharp increase in Treasury bond yields. The anticipation of Trump’s policies driving inflation has already caused yields to surge, with the 10-year note jumping as much as 21 basis points following the election results. Further escalation in bond yields could create concern among investors and potentially lead to a decline in equities.
Another risk identified by Morgan Stanley is the strength of the US dollar, which has seen a substantial increase post-election. This surge is attributed to expectations that US interest rates will remain elevated under Trump’s administration. The rising dollar could pose challenges for large-cap stocks, particularly those with significant exposure to foreign markets, as it may impact earnings growth in the fourth quarter of 2024 and beyond.
Furthermore, equity markets have become increasingly overpriced as investors clamor to capitalize on themes related to artificial intelligence. The disconnect between stock prices and earnings revision breadth suggests that the market may be due for a correction. While this divergence is more relevant for major indices than individual stocks, it indicates that further upside in multiples may hinge on confirming a reacceleration in growth.
Despite these risks, analysts at Piper Sandler caution against adopting a bearish outlook solely based on market valuation. Even with the S&P 500 potentially overvalued by 8%, a catalyst such as a sudden increase in interest rates or inflation would be needed to halt the market’s upward trajectory.
As investors navigate the uncertainties surrounding Trump’s presidency and the global economic landscape, staying informed and monitoring these risks will be critical to making informed investment decisions. Stay tuned to Extreme Investor Network for more insights on the latest market trends and opportunities.