INSIGHTS

What a few weeks it has been. Regardless of your political views, if you appreciate action in the financial markets, you have not been disappointed (on that specific front). The return of Donald Trump has unleashed animal spirits, reinforced (at least for now) American exceptionalism, and brought the crypto currency world to new heights.

Following a relatively solid third-quarter earnings season (though we are still waiting for NVIDIA figures, which come out tomorrow), a natural question is how much of this enthusiasm is warranted. A recent report by Deutsche Bank used the CAPE ratio¹ to show how over the last 15 years the US has moved from the middle of the global pack to the most expensive. Over the last 50 years, the only time the US has been more expensive was during the dotcom bubble from 1998 to early 2000. The outperformance of the US relative to the rest of the world has been a function of both stronger growth and higher valuations.

Going forward, an increase in relative valuations is unlikely, so the real question is whether the US can continue to dominate from a growth perspective. And there is no better place to start than the Magnificent Seven.

More magnificent than the rest

Tesla’s largest shareholder Elon Musk and Trump formed a close alliance after a few fits and starts. Musk was likely Trump’s biggest financial supporter during the campaign, and a vocal advocate. The Republican agenda is not friendly to electric vehicles (in fact, at the time of writing, Trumps’ transition team announced they are planning to kill a $7,500 consumer tax credit for electric vehicles). However, Musk has Trump’s attention and will try to mitigate any negative impact, and we think an easier regulatory path to robotaxis is likely. Tesla investors must have been thrilled with the election result, as the stock has risen 31.3% since election day², making it the biggest winner amongst the Magnificent Seven thus far, though there is a lot baked into its current valuation (and there already was before the election).

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The other six have roughly performed in line with the S&P 500 since the election. Trump has historically had an adversarial relationship with both Alphabet and Meta owing to censorship concerns, while Apple, Amazon, and NVDIA are potentially at risk from tariffs and access to the Chinese market due to potential national security concerns.

All these companies face risks associated with being seen as part of ‘big tech’, which has been a target of significant populist rhetoric and faces adversaries in both political parties.

That said, Trump is known to take a transactional approach, so the companies that are most able to work with him could stand to benefit (at least on a relative basis).

Other winners and losers

As we look forward, there are many unknowns about what Trump 2.0 is going to look like.  From a geopolitical perspective, how the US relationship with China evolves is likely the single biggest unknown. Tariffs, immigration reform, and further tax cuts are all likely to be inflationary. While inflation was one of the issues that helped Trump gather support, the biggest winner here may be longer run inflation expectations and nominal returns.

Trump wants to run a hot economy, and this should be relatively bullish for real assets and bearish for bonds. This could disappoint his populist base (which is generally more exposed to inflation and holds fewer real assets). Another major factor will be the large deficit and federal debt, with interest spending now one of the biggest line items.

With significant spending cuts unlikely without entitlement reform, a hot economy with high nominal growth may be a partial cure for excessive amounts of government debt. However, the landing here may be much more difficult than what the Federal Reserve accomplished by bringing down inflation.

Trump’s climate policy: Less drastic than expected?

Despite Donald Trump’s pre-election pledges to dismantle key climate regulations, early indications suggest that his approach may not be as radical as anticipated. While he has pledged to exit climate accords like the Paris Agreement and undo President Biden’s Inflation Reduction Act (IRA), the practicalities present substantial obstacles.

The IRA, a cornerstone of Biden’s climate policy, offers significant subsidies and incentives for clean-energy technologies. However, its repeal may face resistance, as 79% of IRA funds were directed to Republican districts (Figure 2), making it politically challenging for lawmakers to support a rollback that could adversely affect their constituencies because as we know — all politics is local.

Figure 2: Clean tech investments during the Biden administration

Source: Bloomberg as of 20 June 2024
Note: Congressman in the four districts that received the most IRA funds all voted against the bill.

Furthermore, while Trump campaigned on boosting fossil fuel production, including increased drilling and pipeline expansions, corporate and community commitments to sustainable energy remain strong. These are driven by both the potential economic benefit on offer and environmental responsibility.

Regulatory shifts, such as the projected cuts to funding for the Environmental Protection Agency and modifications to electric vehicle mandates, could increase oil demand. However, Trump’s previous support for wind power and Elon Musk’s increasing role in his administration suggests a more nuanced energy policy than initially anticipated.

In fact, as Figure 3 shows, during Trump’s first term a record number of wind farms were added.

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Furthermore, the possible expansion of fossil fuel extraction on federal lands is tempered by the time required to develop such projects, which could be reversed by future administrations. Additionally, offshore wind permitting may face delays, but resistance from shipbuilding and steelmaking districts could influence policy decisions.

Overall, while Trump’s presidency signals a shift in climate policy, the expected impact may be moderated by political realities and ongoing industry trends, offering a less severe disruption to the green agenda than initially feared.

1. The CAPE ratio is a Cyclically Adjusted price/earnings ratio that attempts to normalise earnings and control for inflation
2. As of 13 November, 2024.
 

All data Bloomberg unless otherwise stated.
With contributions from Dan Taylor, Chief Investment Officer at Man Numeric and Rob Furdak, Chief Investment Officer for Responsible Investment at Man Group.

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