3 risks that could derail the Trump trade in stocks, Morgan Stanley says

• Trump’s election victory led to the US stock market rising to new highs.

• Morgan Stanley says there are three risks that could upend Trump’s ongoing trade.

• The company says investors should watch bond yields and the US dollar closely.

Stock investors welcomed Donald Trump’s return to the White House, but the post-election rally wasn’t entirely without risks.

So far, US indices have reached a high level New heights While investors look to what Trump’s promised policies mean for earnings growth. But while market momentum remains solidly bullish, Morgan Stanley has identified three risks that could turn it on its head.

First, important A jump in Treasury yields The bank said this may raise concern among stock investors.

Trump’s election has already sent yields higher, as Wall Street expects his policies to boost inflation, keeping interest rates high. When it became clear that Trump had won last week, the 10-year bond jumped as much as 21 basis points to 4.47% on November 6.

So far, this has not been enough to discourage stock investors, but Morgan Stanley notes that further increases could spell trouble for stocks. For example, the bank said concern about ballooning government deficits could lead to higher yields.

JPMorgan analysts share these expectations, noting that a rise in the stock market will do just that Facing Exhaustion Once Bond Yields Reach Nearly 5%.

second, A stronger US dollar could mean problems for large-cap stocks.

after the elections, The Bloomberg Dollar Index rose At the largest pace in four years, reaching its highest levels since November 2023.

As with bond yields, the US currency is rising on the possibility that US interest rates will remain higher for longer under Trump. Meanwhile, foreign currencies fell against the dollar on concerns that the president-elect will implement broad tariffs on all US trade.

“If dollar strength continues at the current pace through the end of the year, this could lead to a slowdown in multinational corporate earnings growth in the fourth quarter of 2024 and 2025,” Morgan Stanley wrote, later adding: “This is likely to be felt more heavily in equity indices.” Large cap weights (where cap weights tend to have exposure to higher foreign sales) compared to the average stock, which is why subsurface expansion could continue even if the dollar proves to be a headwind.

third, Stocks continue to get overpriced.

As bullish investors race this year to gain exposure to AI-related market themes,… Standard & Poor’s 500 It has increasingly moved away from its fundamentals.

“More specifically, the S&P’s year-over-year change was rarely separate from the earnings revision range,” the analysts wrote, adding: “Again, this is more a consideration of the major indexes than the stock average but suggests that further upside “In multiples it will likely depend on data confirming re-acceleration of growth.”

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