Both the domestic and global contexts have changed materially since 2016
The writer is chief strategist at UBS Investment Bank “Trump trades” have been stirring this year and have recently picked up pace. For example, amid strong gains in equities overall financials, seen as beneficiaries of deregulation under a Republican president, have outperformed renewables, a sector that a Democrat in the White House would favour. The market seems to be using the template of Donald Trump’s first term to position for a potential second. This would be a mistake.
Now the risk is the opposite: the Fed may cut rates but long-end bond yields may not respond that strongly, keeping the cost of capital for companies high. Third, it isn’t clear that continued lower taxes will incrementally buoy GDP or earnings growth. Consensus expectations of pre- and post-tax earnings show that the market believes low tax rates will persist. The profit margins of S&P 500 companies are seen rising from an already high 12.1 per cent presently to 14.
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