Trump takes office: how have the markets reacted?

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

The stock market’s response to Donald Trump’s election victory has been anything but linear, reflecting a mix of euphoria, skepticism, and recalibrated expectations. With the benefit of hindsight, it appears the markets began to factor in the possibility of a Trump victory after the June 28th debate performance by President Biden and gained further momentum following an assassination attempt in Pennsylvania a few weeks later, which helped galvanize his supporters.

These pivotal moments reshaped the political landscape and boosted Trump’s chances, sparking a rally that carried through to Inauguration Day (aside from a mid-July to early August 8% pullback on the S&P 500, which coincided with Vice President Harris gaining momentum). From the day after the Biden-Trump debate through Inauguration Day, the S&P 500 advanced 10.2%, and the Russell 2000 climbed 12.5%. Optimism about Trump’s pro-business agenda—focused on regulatory rollbacks, corporate tax cuts, and a domestic energy push—drove this momentum, outweighing concerns about his unpredictability or divisive rhetoric.

Exuberance followed by caution

The immediate reaction on the first trading day after the election was exuberance. The S&P 500 surged 2.5%, and the Russell 2000 soared 5.8%, driven by optimism about a policy shift favoring economic growth. Gains extended across financials, energy, and even cryptocurrencies, reflecting widespread investor confidence and expectations of a pro-business government.

However, as December unfolded, markets tempered their enthusiasm. The S&P 500 declined by 2.4%, and the Russell 2000 tumbled 8.3% for the last month of the year, as questions about Trump’s ability to enact his agenda within the constraints of a narrowly divided Congress began to weigh on sentiment. By Inauguration Day, the S&P 500 had advanced by 4.1% since Election Day, and the Russell 2000 had gained 1.0%.

Policy impacts: a pro-business stance

Donald Trump’s return to the White House brings a clear pro-business agenda centered on deregulation, tax cuts, and U.S. energy independence. These policies are particularly impactful for smaller, domestically focused companies, which often face disproportionately high regulatory and compliance costs. Trump’s focus on deregulation could reduce these costs, freeing up resources for growth, while his proposed reduction in the corporate tax rate from 21% to 15% would directly boost after-tax earnings. Additionally, increased domestic energy production is expected to lower energy costs, benefiting a wide range of industries and increasing consumer spending.

Small-cap stocks, which are more reliant on the performance of the U.S. economy than their larger peers, stand to gain significantly from this favorable backdrop. With nearly 50% of its holdings in companies under $10 billion in market cap, the MAPFRE US Forgotten Value Fund bears a significantly greater weighting toward more attractively valued smaller-cap stocks than the broader-market indices.

Challenges and risks

Despite his pro-business stance, Trump faces notable constraints. The Republican Party’s slim legislative majority limits his ability to pass ambitious policies unchallenged, a reality underscored by the December standoff over a government spending bill. Trump’s preferred proposal, which included a debt ceiling suspension, failed to pass, forcing lawmakers to scramble for a smaller agreement that barely averted a government shutdown.

Trump’s aggressive trade policies, particularly toward China, Canada, and Mexico, also pose risks. While intended to protect domestic industries, tariffs can stoke inflation and disrupt supply chains, potentially offsetting the benefits of tax cuts and deregulation. Investors have begun to question whether the economic benefits of Trump’s policies will be enough to counterbalance the inflationary pressures and geopolitical risks his approach may introduce.

Valuations and a potential shift in market leadership

Donald Trump inherits a market with historically high valuations. As Spencer Jakab of The Wall Street Journal noted, the S&P 500 is over 80% more expensive than when Bill Clinton took office and 400% pricier than at the start of Ronald Reagan’s presidency (based on Robert Shiller’s cyclically adjusted price-to-earnings ratio). Historically, elevated valuations have signaled subdued medium-term returns. However, much of this overvaluation is concentrated in a handful of mega-cap tech stocks, leaving valuations of smaller and mid-cap companies at more reasonable levels. This presents opportunities for discerning investors. As discussed above, the MAPFRE US Forgotten Value Fund, with its significant exposure to companies under $10 billion in market cap and limited reliance on mega-cap tech, is well-positioned to benefit from this potential shift.

Staying focused amid uncertainty

While Trump’s presidency introduces both opportunities and unpredictability, the market has historically rewarded those who remain apolitical and focus on fundamentals. For The MAPFRE US Forgotten Value Fund, our strategy remains unchanged: identifying high-quality, underpriced companies that can thrive regardless of macroeconomic and political noise. By staying disciplined and focusing on long-term opportunities, we aim to deliver consistent value for our investors, even in an environment of heightened volatility.