New scenario: How will stocks in the U.S. fare?

By Jonathan Boyar, director of Boyar Value Group and advisor to the MAPFRE AM US Forgotten Value Fund

Trump’s Victory: A Potential Tailwind for U.S. Equities

Donald Trump’s re-election victory is set to bring a mix of policies that could broadly boost U.S. equities, particularly for smaller companies—an area of the market that the MAPFRE US Forgotten Value Fund focuses on—which stand to benefit from deregulation and a greater domestic focus.

Senate Secured, House Control Uncertain

On election day, the Republican Party also regained control of the Senate. However, as of this writing, it remains unclear whether Republicans will retain control of the House of Representatives. The magnitude of the changes Trump will be able to implement depends heavily on whether Republicans control both parts of the legislative branch, although significant policy shifts are expected either way.

Markets React to Trump’s Win

Market action on Wednesday, after it became clear Trump would win, appeared to support this view (though we caution against putting too much emphasis on one day of trading), with the Russell 2000 index of small-cap stocks up over 5%. Gains were widespread across other sectors and asset classes, with strong advances from banks to cryptocurrency. International markets, however, showed a more muted performance, perhaps reflecting Trump’s domestic focused approach.

Deregulation: A Boost for Financials, Energy, and Small Caps

Trump’s regulatory stance is expected to be market-friendly, with a focus on scaling back federal oversight. This approach could lead to gains in sectors like financials, energy, and small caps, as reduced regulatory burdens often translate into lower compliance costs and improved profitability. For smaller companies, which typically lack the resources to manage complex regulations, these changes could be especially impactful, creating a tailwind across multiple industries.

Tax Cuts Could Drive Additional Earnings Growth

Tax policy is another crucial driver for markets under a Trump administration, with a corporate tax rate cut high on the agenda. Trump has proposed reducing the corporate tax rate from 21% to as low as 15%, a move that, if the Republicans continue to control the House of Representatives, could swiftly become reality. This reduction would significantly boost after-tax earnings across sectors, directly benefiting companies' bottom lines and enhancing shareholder value.

Goldman Sachs projects that such a tax cut could drive an additional 4% in earnings per share (EPS) growth for the S&P 500—a substantial gain for companies across the board. Lower taxes would improve cash flows, potentially allowing businesses to reinvest in growth, expand operations, increase dividends, or fund share buybacks, all of which support higher stock valuations. The expected EPS uplift would make U.S. equities even more attractive relative to other global markets, reinforcing the case for sustained market strength.

Energy Independence Policies Could Lower Costs

Trump’s focus on energy independence, with plans for increased oil drilling, is another market-positive factor. Greater domestic drilling could lead to lower oil prices, which would reduce costs for companies that rely heavily on energy inputs and boost consumer spending power. While this approach may stir environmental opposition, lower energy costs would benefit a wide array of sectors and keep more dollars circulating within the economy.

Infrastructure Spending and Inflation Concerns

Infrastructure spending is one area that appears to have bipartisan support. Large-scale projects could benefit sectors like industrials, construction, and materials, boosting demand for resources and creating new jobs. However, when combined with tax cuts and higher defense outlays, this spending could widen the fiscal deficit and potentially stoke inflation—a risk that may prompt the Fed to reconsider its current rate-cutting path if inflationary pressures build. This would increase borrowing costs and tighten consumer budgets, which could ultimately weigh on equities.

Potential Trade Tensions and Tariffs

Trump’s aggressive tariff stance—particularly toward China—also raises the specter of renewed trade tensions. Investors hope that these high tariffs are part of a broader negotiating tactic rather than a final stance. While the eventual impact is hard to predict, tariffs have historically had inflationary effects, and a full-scale trade war would increase costs across supply chains, hitting multinational companies and raising prices for consumers.

Higher Inflation’s Potential Benefits for Banking and Insurance

Two areas of the economy that may benefit from a higher inflationary environment (if well-managed) are banking and insurance—both of which the MAPFRE US Forgotten Value Fund has meaningful exposure to. Specifically, banks have been operating in an environment of an inverted yield curve (with longer-term borrowing costs lower than shorter-term borrowing costs), which significantly reduces profitability. Although it’s early, longer-term interest rates have moved sharply higher, which could be a boon for banks. Higher interest rates can also benefit insurance companies, as they typically invest the majority of their premiums in fixed-income securities, leading to higher profits from increased bond yields.

Banks, along with other industries (including private equity), may also benefit from reduced regulatory pressure on mergers and acquisitions. Lina Khan of the Federal Trade Commission is well-known for her staunch opposition to anti-competitive practices, and a change in FTC leadership could lead to a boost in M&A activity, which has been relatively muted over the past 12-18 months.

Tech and Data Privacy May Face New Scrutiny

Technology and data privacy may also be subject to scrutiny. While Trump’s administration is typically pro-business, his focus on national security could lead to new data privacy oversight, particularly for companies with foreign ties. Increased scrutiny in the tech sector could create volatility, as the industry is heavily reliant on global markets and sensitive to regulatory shifts.

Remaining Disciplined Amid Uncertainty

While a second Trump presidency appears to bring significant changes, his unpredictability remains a wild card. It’s important for investors to remain disciplined and focus on long-term opportunities. Historically, markets have rewarded those who look past the daily headlines, remain apolitical and optimistic, and instead seek out great companies at attractive prices. This is exactly what we aim to do with the MAPFRE US Forgotten Value Fund, where our commitment remains to identifying and investing in high-quality opportunities.