Trump’s economic plans will overheat the US stock market. But investors don’t care

Trump’s economic agenda has Wall Street on a sugar high, pushing the stock market into dangerous territory. The S&P 500 is smashing records, clocking 53 highs this year alone.

Retail investors are going all in, throwing caution and cash into the market’s riskiest corners. But Trump’s policies could light the match that sets this overhyped market on fire.

Think protectionist trade wars, skyrocketing inflation, and corporate tax cuts — all against the backdrop of geopolitical chaos and rising interest rates.

And while the market seems to be loving the chaos, not everyone is. The small-cap Russell 2000 Index, long a laggard, is suddenly the darling of Wall Street. It’s up 20% this year, outpacing the S&P 500’s 26% gain. Traders are betting big on Trump’s “America First” doctrine, which favors domestic-focused companies.

Small caps and tech: A bubble brewing?

Small-cap stocks have latched onto Trump’s trade war rhetoric like it’s a lifeline. The logic is simple: less exposure to international markets equals less risk in a protectionist world. But here’s the problem. Small-cap earnings are weak, and rising borrowing costs could cripple these debt-dependent companies.

And then there’s tech — semiconductors, to be exact. AI hysteria sent chip stocks soaring, but the party might be over. Trade wars are looming, and chipmakers, with their global supply chains, are sitting ducks. The tech sector, which led the market for years, is now underperforming.

Jonathan Krinsky from BTIG warned, “Bulls really need to see semis stabilize here to prevent a bigger breakdown into 2025.” In other words, tech could be the domino that starts the chain reaction.

Trump’s economic fireworks aren’t just a U.S. problem. Emerging markets are bracing for impact too. South Africa is a standout though, having managed to slash inflation to 2.8% — which is a far cry from its post-Covid peak of 7.8%. Its bonds offer juicy returns, and its stock market is outpacing peers.

Investors are all in

Retail investors are acting like it’s 1999, dumping cash into stocks at record levels. Data from Bank of America shows households’ equity holdings are at an all-time high. Risk? What risk? Everyone’s betting the market will keep climbing, but history says otherwise.

Eric Diton of the Wealth Alliance said, “We know from history that when investors are too bullish, the question is who’s left to drive the market higher?”

Institutional investors are also piling on, driving the S&P 500 to back-to-back annual gains of over 20% in 2023 and 2024. That kind of streak hasn’t happened since the dot-com bubble.

Yet, valuations are climbing into nosebleed territory, and bullish sentiment is off the charts. The broader market feels unstoppable, doesn’t it?

Trump’s pick for Treasury Secretary, Scott Bessent, has even reassured some traders with his moderate stance on economic proposals. But let’s not ignore the elephant in the room: Trump’s dream of taking over the Federal Reserve. That risks destabilizing the U.S. economy, and our markets right along with it.

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