Weekly Stock Spotlight: Trump Victory Propels Small-Cap Surge and US Outperformance

Key points:

• Trump’s Victory Fuels Market Confidence: The Red Sweep in the US elections has helped to clear uncertainty, fueling optimism in sectors like financial services, defense, and small-caps, especially regional banks.
• China’s Stimulus Disappoints: The 10 trillion yuan debt relief package offers stability but falls short of boosting consumption and the property market, dampening near-term market optimism.
• Equity Rotation: The market is shifting beyond tech dominance, with small-cap stocks and cyclical sectors benefiting from pro-growth policies, though earnings growth remains a key factor to watch especially for the small-cap space.
• Earnings Focus: Investors will watch Disney’s Q4 report on streaming and theme parks, while Home Depot faces pressure from high interest rates and consumer uncertainty.

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US Elections: Trump Victory Clears Path for Pro-Growth Policies

• Election Outcome Clears Uncertainty: Trump’s sweeping victory across swing states removes election uncertainty, creating a smoother path for market confidence. Though some House races remain uncalled, a Red Sweep appears likely, strengthening expectations for policy continuity and economic support.
• Focus on Pro-Growth Policies: Investors anticipate Trump’s tax cuts and deregulatory stance, which underscore U.S. market resilience and exceptionalism. Sectors benefiting from his agenda, particularly those tied to domestic growth and smaller-cap companies, are already seeing gains. The financial services sector stands out, with regional banks spiking 10% on hopes of regulatory relaxation, lower capital requirements, and a friendlier M&A landscape. For an in-depth discussion on which sectors and stocks were the winners and loser in the aftermath of the US elections and what it means for Big Tech, read this article.
• Fiscal Risks and Inflation Watch: The other side of this growth-focused agenda is rising fiscal pressure. Extending current tax cuts could push deficits up by an estimated $5 trillion by 2034, driving national debt further above 100% of GDP. Additionally, any tariff escalations or tightened immigration policies could add inflationary pressures, particularly concerning after recent inflationary years. Investors will be closely watching the U.S. CPI report on Wednesday; a stronger-than-expected reading could challenge the Fed’s dovish pivot, potentially pointing to a shallower rate cut cycle.

Equity Rotation: Small-Cap Stocks Shine, But Can It Last?

• Growth vs. Inflation Outlook: Despite expectations of a gradual easing cycle from the Fed, strong U.S. economic growth is expected to support corporate earnings, keeping stocks in play. With S&P 500 earnings forecast to accelerate from 0.5% in 2023 to 9% in 2024 and 14% in 2025, risk-reward for equities remains tilted higher.
• Broadening Leadership: Since Q3, the market has shifted beyond its tech-heavy leadership, with value stocks, cyclical sectors, and small- and mid-cap stocks now gaining momentum. With potential tax cuts and deregulation on the table, this could add fuel to the rally. Key Trump Trade themes of reshoring, defense and domestic production could mid-cap U.S. stocks and industrials could remain well-positioned.
• Can the Small-Cap Rally Be Sustained? The Russell 2000 small-cap index jumped 8.5% last week to all-time highs, outperforming the S&P 500 (+4.7%) and NASDAQ 100 (+5.4%). However, this rally could face obstacles due to weak earnings growth, with nearly 40% of Russell 2000 companies unprofitable. It’s crucial to be selective, with focus on small-caps that show strong financial health. For a complete primer on the small-cap Russell 2000 index, read this article. 
• International Risks: Risks like trade tensions and a potentially stronger dollar could hinder international equities. As such, underweighting developed-market international stocks and instead positioning for relative strength within U.S. markets could be attractive in this environment. Emerging market themes are likely to be more nuanced. Countries exposed to tariffs may struggle, while those driven by domestic demand, like India, or benefiting from supply chain shifts, like Vietnam, could see stronger performance.