2025 will usher in both new political and investment regimes, as markets continue to react to a second term for President Donald Trump. Ned Davis Research has compiled some of the most pertinent insights for investors to consider. Trump’s victory in a highly polarized environment removes a piece of uncertainty for investors, as the NDR Daily Trading Sentiment Composite indicated a relieved sentiment leading to a market rally from Election Day through year-end 2024.
We enter the new year with a mixed bag of persistent interest rates yet a positive economic growth outlook. NDR highlights a number of significant factors investors will need to maintain a keen eye on, including:
- A potential 2026 “fiscal cliff” may arise from the expiration of tax cuts implemented by Trump via the Tax Cuts and Jobs Act in 2017. These tax cuts are set to expire next year, and a narrow Republican majority in the House of Representatives could make it challenging to pass extensions. Without such extensions, there will likely be a need for increased taxes.
- Falling bond prices negatively affect small-cap stocks, making them vulnerable to pullbacks if higher interest rates are perceived negatively by investors. Currently, mid-caps are preferred over small-caps and large-caps due to fewer structural headwinds.
- A shift from defensive to cyclical sectors is anticipated after the election, with a preference for cyclical value sectors over cyclical growth, depending on economic growth trends.
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