(Bloomberg) — For investors looking past the initial risk-on rally in US equities following Donald Trump’s decisive election victory, now comes the hard part.
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The Republican president-elect made plenty of campaign promises: steep tariffs, tax cuts, business-friendly deregulation and tighter immigration laws, to name some. For investors who plowed into stocks last week on speculation Trump’s policies will bolster the economy, the challenge is to figure out which sectors will get a lasting boost.
Tariffs, for example, could spark inflation and hurt large multinational firms, while potentially helping domestically oriented small-cap stocks. However, an immigration crackdown risks lifting labor costs, likely squeezing smaller businesses. Meanwhile, a friendly stance toward traditional energy that lifts production might drive down oil prices, and efforts to reverse President Joe Biden’s policies designed to help the clean-energy and electric-vehicle industries could have a hard time getting through Congress.
“I expect active investors to start using a scalpel to sift through at industry levels to see which companies and industries might benefit now,” said Eric Clark, a portfolio manager at Accuvest Global Advisors. “In time we will get more data points on what will actually be implemented and how to play that.”
Clark has already acted on some opportunities. As banks, industrials, energy and big-technology stocks pushed the equities market higher on Wednesday, he sold some tech and financial shares. He also bought stocks in luxury retail and consumer staples — which were in the red amid the surge.
Clearer Picture
Small-cap stocks rallied last week, and they appear to be in a sweet spot as traders assess the potential policy backdrop ahead. These companies, which make most of their revenue at home, stand to benefit from heightened protectionism. A possible corporate-tax cut should also help.
Trump has proposed a 10% to 20% across-the-board levy on imports, and as high as 60% on China-made goods. The prospect that at least some tariffs will come to fruition helped drive the Russell 2000 Index (^RUT) — a benchmark for small-cap stocks — up 8.6% last week. Digital payments company Sezzle Inc. (SEZL), one of the gauge’s top gainers, doubled during that time.
Financial stocks are also seen as being in a strong position, given Trump’s pledge to make changes to regulatory bodies that have pursued tougher banking rules under Biden. As Wells Fargo & Co. bank analyst Mike Mayo sees it, a new era of deregulation could boost Wall Street profitability. Shares of Citigroup Inc. (C), Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM) soared on Trump’s victory.
“Equities are eager to price in Trump’s domestic growth policies via small-caps, and hopes for easier regulation” through bets on shares of financial and big-tech shares, said Venu Krishna, a US equity strategist at Barclays.
Industrials and machinery companies, such as Caterpillar Inc. (CAT), are poised to gain from a focus on domestic production of energy and mining commodities.
Jefferies analyst Stephen Volkmann reiterated Caterpillar as his top pick in the sector, noting in part its limited exposure to China. He also said that distributors of industrial supplies, companies like Fastenal Co. (FAST) and WW Grainger Inc. (GWW.VI), have a strong track record of passing on cost increases, such as from higher tariffs.
The prospect of an immigration crackdown is a potential headwind that investors are watching closely. Still, there are some firms that could benefit, like private prison operators such as CoreCivic Inc. (CXW) and GEO Group Inc. (GEO).
More Muddled
Meanwhile, some on Wall Street are voicing doubts about certain post-election market moves.
Stocks in the traditional energy sector, which includes oil and gas companies, jumped on Trump’s election, given his pro-oil stance. Yet, industry watchers warn that efforts to loosen regulations to allow for more fossil-fuel extraction on public lands risks creating a supply glut that would sink prices.
Retailers, given their generally heavy exposure to China through the supply-chain, slumped last week, and they will likely be in investors’ cross-hairs as tariff talk builds. Discount chains and home furnishings companies may see some of the biggest impact, says Barclays analyst Seth Sigman. He called out firms including Five Below Inc. (FIVE), Dollar Tree Inc. (DLTR) and electronics retailer Best Buy Co. (BBY).
Yet, to Accuvest portfolio manager Clark, some consumer companies look attractive, because any tariff increases likely wouldn’t be applied equally across the board.
“I’m less concerned about onerous tariffs on European luxury brands, such as LVMH (MC.PA) Moet Hennessy Louis Vuitton, Hermes International (RMS.PA), L’Oreal (OR.PA), Ferrari NV (RACE.MI), versus those likely in China,” he said.
The picture is similarly complex for another sector that took a hit last week — clean energy and renewables. The iShares Global Clean Energy ETF (ICLN) is coming off its worst week since March.
However, the outlook may not be so dire. Trump has said he intends to reverse the Inflation Reduction Act — which is designed to boost use of clean energy, including electric vehicles — but analysts see little likelihood of a full rollback. A key reason is that the law has led to a wave of investment in Republican districts.
The specter of a shift will act as an overhang for the industry as investors await clarity, according to RBC Capital Markets analyst Christopher Dendrinos.
“On the other hand, the expectation that policy changes will take significant time to pass and even longer to be implemented diminishes the overall impact and could change again under another administration,” he said.
Other elements of Trump’s policies may even help some of the stocks, Dendrinos said.
The analyst expects First Solar Inc. and Fluence Energy Inc. to outperform peers given the outlook for a protectionist agenda and strong domestic demand.
—With assistance from Katrina Compoli and Eleanor Harmsworth.
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