Last week, US shares experienced a significant setback as the Trump trade lost momentum and the prospect of slower Fed rate cuts gained traction, with the S&P 500 erasing more than half of the gains it had made since the election.
Namely, US share markets declined for the second consecutive session on Friday, following comments from Federal Reserve chair Jerome Powell suggesting a slower pace of interest rate cuts. The rate-sensitive information technology sector led the losses, falling 2.5 per cent, while the Dow Jones dropped 0.7 per cent, the S&P 500 fell 1.3 per cent, and the Nasdaq shed 2.2 per cent.
For the week, the Dow lost 1.2 per cent, the S&P 500 slid 2.1 per cent, and the Nasdaq fell 3.2 per cent, marking their biggest weekly losses in more than two months.
Commenting on last week’s developments, AMP’s chief economist Shane Oliver noted that the market’s initial reaction to Trump’s victory has evolved, as investors reassess the broader implications of his policies.
“I think what we saw initially was just a knee-jerk reaction as investors took [Trump’s] policies regarding tax cuts and deregulation in isolation, so there’s sort of a tendency for us to focus on the positive,” Oliver told InvestorDaily.
“Of course, the share market sort of ignored what was going on in the bond market initially, and also ignored the risks around tariffs. Now what’s happening is a more nuanced sort of thoughtful response, and in particular, investors have become more concerned about the backup in bond yields”.
Moreover, the economist pointed out that the current economic landscape is very different from 2016, when Trump first took office. At that time, stock valuations were relatively cheap, inflation was benign, and bond yields were well below current levels.
“It’s a radically different situation,” Oliver said.
“Now, shares are a lot more expensive and bond yields are a lot higher, which is not a good combination for the share market because shares are not offering any risk premium over bonds at current levels.
“Investors have, I think, become a little bit more concerned about this continuing backup in bond yields, which is partly reflective of the concerns about the budget deficit in the US, and also because we’ve had somewhat elevated inflation numbers lately in the US, and so there’s been a reduction in expectations as to how much the Fed will cut interest rates.”
In addition to concerns over bond markets, Oliver emphasised the risk of escalating trade tensions during Trump’s second term.
“Tariffs probably aren’t a big problem for small caps, but they could be a big problem for large caps, large multinationals in the US that have global businesses for the simple reason that, if America imposes tariffs on goods from the US, then other countries could retaliate against US companies,” he said.
“The Chinese and the Europeans look as if they’re prepared a lot better this time around compared to the situation eight years ago. Therefore, you’d probably see a quicker, more aggressive response that could involve imposing tariffs on US companies.”
He highlighted that among the targeted companies could possibly be Apple and Tesla.
Moreover, Oliver warned that Trump may move more swiftly to enforce trade policies in his second term, feeling increased pressure to act quickly as it will be his final time in office.
“This time around, he might say, ‘Well, I’ve got to move faster and then push on with the tariffs a lot earlier’,” he said.
“The share market’s deciding that it’s a lot more complicated perhaps than first thought, and that’s why it got a few wobbles last week, particularly later in the week.”
Ultimately, Oliver noted the share markets have decided that things are “a lot more complicated than first thought”.
Trump’s ‘pro-growth’ agenda is being reassessed
In a market note on Monday, Saxo chief investment strategist Charu Chanana warned that high-beta stocks, including small caps and cyclical sectors, will be particularly vulnerable to trade disruptions, a growing focus on Trump’s fiscal agenda.
“Trump’s recent cabinet appointments, including key China hawks, signals a stronger immediate focus on trade and tariffs over tax reforms,” Chanana said.
“The emphasis on tariffs introduces uncertainty and market volatility, particularly for sectors heavily reliant on global supply chains … this poses downside risks for equities, particularly those exposed to international trade.”
The strategist warned investors to approach equities with caution, as tariff headlines are likely to be risk-negative in the near term.
“Defensive sectors such as consumer staples, healthcare, utilities and select retailers with less exposure to offshore production could be relatively more resilient,” she said.
