A second term for Donald Trump could help maintain double-digit earnings growth and serve as a positive driver for the US stock market.
The US stock market surged by 24% in the year following Trump's election victory in November 2016. At that time, investors anticipated the prospect of pro-growth policies spurring on the US economy.
The best performing areas of the market were the cyclical sectors, such as technology and financials, as they were boosted by the possibility of a more favourable regulatory environment.
In particular, the plan to cut taxes on overseas profits lifted the share price of the technology sector, which at that time also included some of those “Magnificent 7” that have since been reclassified as communication services companies.
The industrials and materials sectors also did well on the back of an expected increase in infrastructure and defence spending. By contrast, some of the defensive sectors, including utilities and consumer staples, were left behind in the strong equity rally. The underperformance of the cyclical energy sector was an anomaly, mainly due to supply factors and robust gains before Trump got elected.
Undoubtedly, the anticipation of pro-growth policies played a significant role in the re-rating of the US market which occurred at that time. But it is important to note that stronger corporate earnings growth also contributed to the market's performance. Against a backdrop of stronger US economic activity, the growth rate of S&P 500 earnings in 2017 more than doubled, reaching 11.8%.
While past performance is not a guide to future returns, if Trump does win this time, the US market could again benefit from the expectations of stronger earnings growth. Although there is the risk of higher government bond yields from a larger budget deficit, which could undermine already rich equity valuations.
At the same time, investor sentiment could be hit by the imposition of further trade tariffs. All that said, from an earnings perspective, our S&P 500 EPS (earnings per share) model suggests that earnings are likely to expand at a faster pace with a Trump victory.
In the scenario of a Trump victory, we anticipate a more positive expansion in margins and a stronger profile of capacity utilisation driven by our robust US growth forecast as a result of more favourable regulatory environment and further tax cuts. Trump is planning to extend the 2017 Tax Cuts and Jobs Act (TCJA) and has also said that he would cut the corporate tax rate. This would enable US earnings to maintain their double-digit growth in the coming years, particularly in 2026 and 2027.
Such a trend would serve as an important positive driver for the US market, with the more cyclical sectors likely to benefit the most based on the past performance playbook.
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