Stock investors are brushing aside economists’ gloomy predictions about US president-elect Donald Trump’s economic policies, betting instead that his plans will boost corporate earnings and power the market higher.
Wall Street’s S&P 500 benchmark soared to record highs last year and, although there has been a recent pullback, equity strategists have predicted gains of about 10 per cent for the index this year on the back of strong earnings growth.
That bullish tone contrasts sharply with recent warnings from economists about the likely damage from Trump’s protectionist policies, which, they say, could hit economic growth, raise inflation and limit the Federal Reserve’s ability to cut interest rates.
Some put that sharp divide down to differing views about the extent to which Trump will implement his plans, doubts about the impact of GDP growth on the profits of the Big Tech groups driving the market’s rally, and differing timescales on which to gauge the effects of the new president’s policies.
“I suspect economists are taking a lot of what Trump says he will do as likely to play out,” said Evan Brown, portfolio manager and head of multi-asset strategy at UBS Asset Management. “Investors, rightly or wrongly, are betting that Trump won’t follow through to nearly the same extent.”
Recent Financial Times polls found more than half of 47 economists surveyed on the US economy forecast “some negative impact” from Trump’s policies, with a further tenth expecting a “large negative impact” and only one-fifth predicting a positive effect.
Many focused on the risks from two high-profile Trump policies: trade tariffs and curbs on US immigration.
“If I were to channel an economist and look at this new era as a glass half empty, those would be exhibits A and B that I would point to,” said Jurrien Timmer, director of global macro at Fidelity. “But the market is looking at earnings.”
Analysts are forecasting earnings growth of 15 per cent for the S&P 500 in 2025, according to data compiled by FactSet, up from about 9 per cent for last year. Net profit margins are expected to expand to their widest in a decade.
A number of fund managers said it was still too early to change their profit forecasts, given uncertainty about which policies Trump will implement or what impact they will have in practice.
Barry Bannister, chief equity strategist at Stifel, said: “Immigration will initially target border control and criminal elements, but with many new immigrants actually tilting Republican . . . we doubt there will be mass deportations.”
Tariffs are also likely to be targeted rather than the sweeping ones threatened by Trump, he added, designed to boost US exports and inward investment into US manufacturing.
Economists’ and investors’ contrasting views may also stem from whichever of Trump’s two major campaign pledges — to “make America great again” through tariffs and immigration curbs, and to shrink the federal government — the two groups believe will dominate the next four years, said Jason Draho, head of asset allocation for the Americas at UBS Global Wealth Management.
Broadly, Maga “benefits labour” while deregulation “favours capital”, he added. “The more [deregulatory] that the Trump 2.0 economic policies end up being, the more constructive the investment outlook,” he added.
Some also point to the historical lack of correlation between economic growth and stock market returns as reassurance that, even if growth does suffer, that does not necessarily trigger a bear market.
Kevin Khang, senior economist at Vanguard, said: “There’s a lot that goes into giving you a positive stock market return, other than just economic growth.”
Trump’s pro-business stance is expected to encourage companies to invest, potentially helping sectors beyond tech boost their earnings too.
Rick de los Reyes, a portfolio manager at T Rowe Price, said: “You can see some companies that were hesitant to make investment decisions before, are more willing to do it now.”
Earnings for the Magnificent 7 are forecast to grow 21 per cent this year, down from 33 per cent in 2024. That is still ahead of other sectors, but by less this year, with earnings for the other 493 members of the S&P 500 set to grow 13 per cent this year, up from 4 per cent, according to FactSet.
Ultimately both economists and investors could be proved right — but over different time periods. Investors tend to think shorter-term, with the market often looking to upcoming earnings and the potential for looming tax cuts. Over a longer time period, economists could still be correct to worry about whether lower taxes will worsen the federal budget deficit or about potential damage to GDP growth from tariffs and immigration curbs.
Mitch Reznick, group head of fixed income in London at Federated Hermes, said: “The loose fiscal policies that support the economy in the near-term could also lead to reflation and widening deficits in the medium- to longer-term.”