A New Era for Wall Street: What Trump’s Second Term Means for Investors
The results are in, and Donald Trump has secured a second term as President of the United States. As the dust settles, investors are left wondering what this means for the economy and the stock market. One thing is certain: the lawmakers elected to office play a crucial role in shaping fiscal policy, which has a direct impact on corporate earnings.
A Look Back at Trump’s First Term
During Trump’s initial stint in the White House, the stock market experienced unprecedented growth. Despite the brief COVID-19 crash in 2020, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite saw gains of 57%, 70%, and 142%, respectively. The question on everyone’s mind now is: what can we expect from Trump’s second term?
Tax Cuts and Jobs Act 2.0?
One proposal that could gain traction once Trump takes office is a further reduction in corporate income tax rates for businesses that manufacture products in the United States. Trump’s flagship Tax Cuts and Jobs Act (TCJA) lowered personal income tax rates and permanently reduced the corporate income tax rate from 35% to 21%. During his campaign, Trump suggested slashing the current peak corporate income tax rate by 29% – from 21% to 15% – for companies that make their products domestically.
The Potential Impact on Corporate Earnings
If enacted, this proposal could lead to an increase in hiring, wages, merger and acquisition activity, and innovation. However, the biggest correlation has been the significant uptick in share repurchase activity. Since the TCJA became law, buybacks from S&P 500 companies have regularly ranged from $200 billion to $250 billion per quarter.
The Clear Winner: Publicly Traded Companies
The clear winner of another round of corporate income tax rate cuts would undeniably be publicly traded companies that have prioritized share buybacks. Buybacks can incrementally increase the ownership stakes of existing shareholders, lead to higher earnings per share, and demonstrate to Wall Street that a company’s board and/or management team view their shares as intrinsically cheap.
A Historical Perspective
While there are concerns and unknowns surrounding Trump’s second term, history suggests that investors who maintain perspective and look to the horizon are well-positioned for success. Recessions are a normal part of the economic cycle, but the majority of economic expansions have endured for multiple years. Wagering on the U.S. economy to expand over time has been a smart move.
The Stock Market’s Nonlinearity
The same nonlinearity can be observed in the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite. The average length of an S&P 500 bear market is roughly 9.5 months, while the typical bull market is 3.5 times as long. Regardless of the political landscape, the stock market continues to deliver for those who are patient.
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