Donald Trump’s vetting of cabinet picks second time round may have thrown up some blunders, with his nominee to lead the Drug Enforcement Administration (DEA) this week following the fate of Matt Gaetz’s short-lived candidacy for attorney general.
Chad Chronister, currently a Florida sheriff, withdrew his name to run the DEA from consideration – though Trump says he pulled the plug – on Wednesday as a result of uproar among Republicans over his arrest of a pastor in 2020 for holding large services during a Covid lockdown. It follows Gaetz withdrawing his name for lawyer-in-chief last month amid allegations of sexual misconduct.
However, the band Trump is putting together elsewhere – including hedge fund billionaire Scott Bessent being picked as treasury secretary, oil industry veteran Chris Wright as energy secretary, stockbroking firm Cantor Fitzgerald chief executive Howard Lutnick as commerce secretary, and Paul Atkins, a free marketeer and crypto-friendly lawyer, as head of the Securities and Exchange Commission – has been warmly received at a constituency close to his heart: Wall Street.
The stock market, as we learned during Trump’s first term in office, is Trump’s favoured barometer of success – having regularly peppered speeches back then with the question, “How’s your 401(K) doing?” That referred to the stock-laden retirement savings vehicles used by more than 100 million Americans.
New York’s S&P 500 index of blue-chip US companies, the world’s most widely followed equities index, has advanced almost 5.5 per cent since Trump outflanked Kamala Harris just over a month ago – bringing its advance so far this year to 28 per cent, and to an all-time high.
Investors have committed almost $140 billion (€132.3 billion) of fresh money to US equity funds since the election, with November being the busiest month for inflows on records stretching back to 2000, on hopes the incoming administration will unleash sweeping tax cuts and reforms to help corporate America, the Financial Times reported on Friday, citing figures from market data provider EPFR.
The S&P 500, which has a major influence on stock markets globally, is on track to reach 6,500 points by the end of next year, according to median forecast of 48 equity strategists recently polled by Reuters. That points to about a 7 per cent advance from current levels.
Former Iseq heavyweights CRH and Flutter Entertainment have quit the Irish market in the past 15 months and moved their main listings to the US with an aim of ultimately joining the S&P 500. Smurfit Kappa secured direct entry to the index in July when it merged with a US cardboard box-making rival to form Smurfit Westrock.
But never has the US market been dominated by so few. The so-called magnificent seven group of high-performing stocks – including Nvidia, the maker of powerful artificial intelligence (AI) computer chips, Microsoft, Tesla, Meta, Alphabet, Apple and Amazon – have driven the broader market higher in 2024. Nvidia’s 200 per cent surge alone has fuelled a fifth of the S&P 500’s gain this year. And the seven are seen leading the way again in 2025, according to strategists.
There’s a lot of hope priced into equities right now. But investors don’t have to look too far to see red flags.
Following this year’s rally, companies on the S&P 500 are trading at an average of 23 times expected earnings, according to stock market research firm Birinyi Associates. That’s well over the 10-year average of about 18. Tech valuations are even more stretched.
Joe Davis, chief economist of Vanguard, the world’s second-largest manager, warned this week that the market had overestimated the short-term potential of AI technology, increasing the risk of a price “correction”. He said some tech valuations were approaching those of 1997 – referring to the tech bubble era.
While JP Morgan strategists were upbeat on equities in their 2025 market outlook, published this week, as central banks continue to ease interest rates and the new US administration embarks on a programme of deregulation, they warned of a risk of “disruptive Trump policies triggering a crash landing”. Historically high prices for US housing, crypto currencies (Bitcoin breached $100,000 for the first time on Thursday) and gold, as well as low corporate bond market interest rates, relative to risk, broaden the potential fallout.
The Central Bank of Ireland highlighted in a report this week that there is a “widening disconnect” between economic uncertainty – also stemming from the ongoing war between Russia and Ukraine, conflict in the Middle East, and fears about a possible US-China clash over Taiwan – and current low volatility in global equity and debt markets. This increases the chances of a “sharp repricing of assets”, it warned.
Trump 2.0, with a return of “America first”, has already seen the president-elect suggest universal tariffs on all goods imported to the US and sharply higher levies on Chinese goods. He has also threatened neighbouring Mexico and Canada with 25 per cent taxes on goods from both unless they stem immigration to the US and flows of drugs.
Economists have said tariffs will be inflationary and force the US Federal Reserve to reverse course on its current cycle of easing interest rates.
“The effects would be inflationary in the short term – with companies facing higher input costs and consumers paying more for finished goods; [and be] a drag on US GDP in the medium term, while underpinning still-high benchmark interest rates,” said S&P Global Ratings. GDP stands for gross domestic product.
Inflation could also be stoked if mass deportations of illegal immigrants kick in – or people start self-deporting in droves – under Trump. Fewer workers in some industries could put upward pressure on wages.
Stock market bulls argue Trump will be quick to change course on any economically disruptive policies if they lead to a stock market sell-off. But that won’t prevent volatility in the meantime.
And incoming cabinet members should know from the experience of the walking wounded from Trump’s first administration, he’ll always find someone else to blame.
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