Trump ties his legacy to the S&P 500, giving Wall Street hope

Donald Trump has always treated the stock market like his personal scoreboard. Back in his first term, he used every high in the S&P 500 as a victory lap, bragging about 401(k)s and pushing Americans to buy the dip whenever the market stumbled.

He even blamed Fed Chair Jerome Powell for selloffs and reportedly considered firing him at one point. Now, as he prepares for a second term, he’s making the S&P 500 the centerpiece of his economic agenda all over again.

For Wall Street, that’s good and bad. Investors who’ve enjoyed the S&P 500’s staggering 50% climb since the start of 2023 are optimistic Trump’s obsession with the market will keep the bull run alive. But they’re not blind to the risks.

Trump’s economic plans come with a heavy price tag: tariffs, tax cuts for corporations, and a hardline stance on immigration. Strategists are already sounding alarms about inflation, slower growth, and a ballooning budget deficit.

Wall Street floods back into stocks post-election

Trump’s election victory on November 5 lit a fire under the markets. The S&P 500 posted its best post-Election Day session ever, with $56 billion flowing into U.S. equity funds in a single week. That was the biggest inflow since March, according to Bank of America strategists.

The Nasdaq 100 and the Dow joined the rally, with all three major indexes hitting record highs, though they’ve pulled back slightly over the past three days.

The rally is impressive, especially considering Trump’s policies aren’t exactly music to investors’ ears. His proposals include tariffs ranging from 10% to 20% on all imports, with an even steeper 60% levy on goods from China.

UBS economists say these measures could slash S&P 500 profits by 10% and cause a market-wide pullback. Barclays analysts warn that the universal tariff could cut 3.2% off earnings by 2025.

Companies reliant on imports are already feeling the pressure. The Nasdaq Golden Dragon China Index, which tracks U.S.-listed firms with significant Chinese business, has dropped 8.9% since Election Day. 

Meanwhile, big names like Coca-Cola, PepsiCo, and Hasbro are down 5.5% to 7%. Jamie Dimon, CEO of JPMorgan Chase, thinks Trump will tread carefully here. Speaking at the APEC CEO Summit, he said he believes the president-elect would avoid tanking the market with his trade policies.

That said, Trump’s history with tariffs has been unpredictable. In his first term, he often used them as bargaining chips, imposing and withdrawing them based on how markets reacted.

This isn’t 2017 anymore

Comparisons to Trump’s first term are tempting but misleading. The economy has changed drastically. When Trump took office in 2017, the S&P 500 had just finished a modest 9.5% gain in 2016. Interest rates were practically zero, and fiscal policy had room to grow.

Fast forward to today, and the situation is starkly different. The S&P 500 has been on a two-year tear, climbing 53% since the end of 2022, with more than 50 record highs in 2024 alone. Interest rates are now between 4.5% and 4.75%, and the Federal Reserve is less inclined to cut again this year.

Marko Papic, chief geopolitical strategist at BCA Research, believes Trump’s second term won’t mirror the first. “Trump 2.0 will curb immigration and fiscal policy,” he wrote, pointing out that the twin drivers of America’s economic edge—open borders and aggressive spending—are now constrained.

Without a massive stimulus package like the $1.5 trillion tax cut and $1.3 trillion spending spree he unleashed in his first term, Trump’s ability to fuel growth is limited.

The bond market is already flashing warning signs. Traders are betting on a Treasury selloff, anticipating higher deficits and rising inflation under Trump’s watch. If bond yields spike, it could knock the wind out of the equities.

Earnings growth: A double-edged sword

Corporate earnings have been the backbone of the market’s decade-long rally, but the outlook is dimming. Bloomberg Intelligence data shows that earnings-revision momentum, a measure of upward versus downward adjustments to profit forecasts, has turned negative. This is its second-worst level in a year, a clear sign that optimism is waning.

S&P 500 companies did pull off an 8.5% profit increase in the third quarter, beating early projections of 4.2%, but the future isn’t as bright. Analysts expect profits to grow just 15% annually in 2025, up from 8% this year. That sounds decent until you consider the earnings recession that ended last year was both long and shallow—a mere 13% drop compared to the typical 26% seen in past downturns.

Companies are also hesitant to provide guidance. With Federal Reserve policies in flux, China’s economy stalling, and fiscal policy up in the air, the crystal ball is foggy. Mike Wilson, Morgan Stanley’s chief U.S. equity strategist, noted that many firms have avoided commenting on 2025 projections, leaving analysts in the dark.

Energy and materials companies are feeling the brunt of this uncertainty. Falling crude prices have forced analysts to slash earnings forecasts for the sector. Excluding energy, the S&P 500’s earnings are expected to grow by about 11% year-over-year in the third quarter.

Investors are left struggling to find balance as Trump takes back the Oval. Remains to be seen what he ends up actually doing once he’s in there.