With Trump Win Boosting Stocks, Investors Hunt for Next Winners

By Investor Empires On Nov 10, 2024

(Bloomberg) — For investors looking beyond the initial surge in risk appetite in U.S. stocks after Donald Trump’s decisive election victory, now comes the hard part.

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The Republican president-elect has made a lot of campaign promises: steep tariffs, tax cuts, business-friendly deregulation, and tougher immigration laws, to name a few. For investors who invested in stocks last week amid speculation that Trump’s policies would boost the economy, the challenge is knowing which sectors will get a lasting boost.

Tariffs, for example, could spark inflation and hurt large multinational corporations, while potentially helping small, domestically capitalized stocks. However, the immigration crackdown threatens to raise labor costs, which could put pressure on small businesses. Meanwhile, a friendly stance toward conventional energy that raises production could lead to lower oil prices, and efforts to reverse President Joe Biden’s policies designed to help the clean energy and electric vehicle industries may have difficulty getting approval from Congress.

“I expect activist investors will start using a scalpel to scrutinize at industry levels to see which companies and industries may benefit now,” said Eric Clark, portfolio manager at Accuvest Global Advisors. “Over time, we will get more data points about what will actually be implemented and how that will play out.”

Clark has already acted on some opportunities. While banking, industrial, energy and big technology stocks pushed the stock market higher on Wednesday, some technology and financial stocks sold off. He also bought shares in retail and luxury consumer goods — which were in the red amid the rally.

Clearer picture

Small stocks rose last week, and appear to be in a good position as traders assess the potential policy backdrop ahead. These companies, which generate most of their revenues at home, will benefit from increased protectionism. A potential reduction in corporate tax should also be beneficial.

Trump proposed imposing a comprehensive tax ranging from 10% to 20% on imports, and up to 60% on goods made in China. The prospect that at least some of the tariffs could come to fruition helped push the Russell 2000 — an index of small stocks — up 8.6% last week. Digital payments company Sezzle Inc., one of the biggest gainers on the scale, more than doubled in value during that period.

Financial stocks are also seen as being in a strong position, given Trump’s pledge to make changes to regulators that followed stricter banking rules under Biden. As Wells Fargo & Co. analyst Mike Mayo argues, a new era of deregulation could boost Wall Street’s profitability. Shares of Citigroup, Goldman Sachs Group, and JPMorgan Chase & Co. rose after Trump’s victory.

“Stocks are eager to price Trump’s domestic growth policies through small caps, and are hoping for easier regulation” through bets on financial and big technology stocks, said Venu Krishna, U.S. equity strategist at Barclays.

Industrial and machinery companies, such as Caterpillar, are poised to benefit from the focus on domestic production of energy and mining commodities.

Jefferies analyst Steven Volkman emphasized that Caterpillar is his top pick in the sector, citing in part its limited exposure to China. He also said industrial supply distributors, companies like Fastenal Co. and WW Grainger Inc., have a track record of passing on cost increases, such as higher tariffs.

The prospect of crackdowns on immigration is a potential headwind that investors are watching closely. However, there are some companies that could benefit, such as private prison operators like CoreCivic Inc. and GEO Group Inc.

More confused

Meanwhile, some on Wall Street expressed doubts about some of the market’s post-election moves.

Shares in the traditional energy sector, which includes oil and gas companies, jumped after Trump’s election, due to his pro-oil stance. However, industry observers warn that efforts to ease regulatory restrictions to allow more fossil fuels to be extracted from public lands threaten to create a supply glut that will drive down prices.

Retailers pulled back last week, given their heavy exposure to China through the supply chain, and are likely to be in investors’ crosshairs as talk of tariffs grows. Discount chains and home furnishings companies may see some of the biggest impact, says Seth Sigman, an analyst at Barclays. He called on companies including Five Below Inc., Dollar Tree Inc. and electronics retailer Best Buy Co.

However, Accuvest portfolio manager Clarke says some consumer businesses look attractive, because any tariff increases will likely not be applied equally across the board.

“I am less concerned about burdensome tariffs on European luxury brands, such as LVMH Moet Hennessy Louis Vuitton, Hermes International, L’Oreal and Ferrari NV, versus those likely in China,” he said.

The picture is similarly complex for another sector that took a hit last week: clean energy and renewable energy. The iShares Global Clean Energy ETF is coming off its worst week since March.

However, the outlook may not be so bad. Trump has said he intends to repeal the inflation-reducing law — designed to promote the use of clean energy, including electric cars — but analysts see little prospect of a full reversal. One of the main reasons is that the law led to a wave of investment in Republican areas.

The specter of a turnaround will be a drag on the industry as investors wait for clarity, according to RBC Capital Markets analyst Christopher Dendrinos.

“On the other hand, expectations that policy changes will take a long time to pass and even longer to implement underestimate the overall impact and could change again under another administration,” he said.

Dendrinos said other elements of Trump’s policies may help some stocks.

The analyst expects First Solar Inc. to outperform. and Fluence Energy Inc. over their counterparts due to expectations of a protectionist agenda and strong domestic demand.

– With assistance from Katerina Comboli and Eleanor Harmsworth.