Following Donald Trump’s victory over Kamala Harris, investors have sent US stocks soaring on the belief that the president-elect will get the country back to even lower taxes and fewer regulations.
While it’s undeniable that the S&P 500, the Nasdaq, and even bitcoin have all hit record highs in recent days, seasoned market watchers are cautioning that stocks may be getting a little too hot.
For months, experts have been saying that stocks are getting more expensive relative to their earnings, assets or other financial indicators.
The S&P 500 recently traded 22 times higher than its expected earnings over the next year, above its five-year average of around 20 times.
Bank of America strategist Savita Subramanian said the market is ‘dangerously bullish’ in a note to clients.
Her perspective is one among many who believe investors might be celebrating policies that could boost stocks, while ignoring other plans that could kickstart inflation and market volatility.
It’s a stunning rebuke of the millions of investors who poured nearly $56 billion into exchange-traded funds and mutual funds this past week, ending Wednesday.
The bond market has its own warning signs, as the benchmark 10-year Treasury yield shot up to 4.426 percent on Friday up from 4.072 percent around a month ago.
This metric ticking up indicates that bond investors expect bigger deficits and higher inflation in the years to come, despite Trump’s impassioned calls to get prices and government spending under control.
Donald Trump’s election win is sending stocks into the stratosphere, but some analysts worry that the euphoria will be short-lived (Pictured: Trump meets with President Joe Biden in the White House on November 13)
A trader wears a hat in support of Republican Donald Trump, after he won the U.S. presidential election, at the New York Stock Exchange (NYSE) in New York City, U.S., November 6
Bank of America strategist Savita Subramanian, pictured, point to Trump’s proposed tariffs as a possible weakness for stock performance in the future
Inflation is still on the minds of Americans, despite the roaring stock market. Days ago, the Bureau of Labor Statistics announced that inflation ticked up to 2.6 percent on an annual basis in October, slightly higher than September’s 2.4 percent.
It appears the Federal Reserve’s mission to get inflation back down to 2 percent isn’t over, even though the body lowered interest rates by 25 basis points during its November 7 meeting.
The equity risk premium – the gap between the earnings yields of the S&P 500 and 10-year treasuries – has shrunk almost to zero, the lowest since 2002, according to The Wall Street Journal.
This means the advantage investors get for owning stocks over bonds is practically nothing.
Subramanian added that while profits are more important than politics, ‘policy pivots can affect profits.’
‘Expectations of corporate tax cuts, deregulation, and unloosed M&A (mergers & acquisitions) under a Trump administration are likely incrementally positive for stocks,’ she wrote last week.
At the same time, she claimed that if Trump were to implement a 60 percent tariff on Chinese goods and a 10 percent baseline tariff on all goods entering the United States, the S&P 500 could be hit with a 3 percent decline in earnings per share.
Stocks faltered at the end of this past week, most notably with vaccine makers like Moderna and Pfizer retreating after vaccine skeptic Robert F. Kennedy Jr. was given the nod by Trump to lead the Department of Health and Human Services.
But overall, it’s not hard to see why investors are bullish on the market.
With just weeks left in 2024, the S&P 500 is on track to deliver gains above 20 percent for the second year in a row, which has only happened three times in the last century.
The S&P 500 tracks the performance of the 500 biggest companies in the US, including major tech companies such as Amazon and Apple, and banks including JPMorgan Chase and Bank of America.
Robert F. Kennedy Jr. being selected as Trump’s Health and Human Services secretary sent shares of Moderna down over 12 percent since it was announced. Similarly Pfizer shares went down roughly 7 percent
Trump’s win made one of his closest confidantes, Elon Musk, billions of dollars richer since Tesla soared after the election
The Russell 2000, another stock index tracking small-cap companies, is up nearly two percent since the election.
The gains seen by Tesla after Trump’s historic win added billions to Elon Musk’s fortune, as the world’s richest man remains in the former president’s orbit.
The riskier corners of the stock market are also flourishing post-election.
Three of the top five days for trading call options, trades that give the right to buy shares at a specified price and date, have occurred this month, according records going back to 1973.
And trading in the over-the-counter market, which include penny stocks, has jumped 27 percent in November when compared to last year, according to OTC Markets Group.
Nearly 50 percent of investors were bullish on the market this past week, according to a survey done by the American Association of Individual Investors.
And just under 40 percent of those surveyed said the election outcome made them more optimistic about stocks.
Joe Johnson, 37, is one of them. His portfolio has surged after investing in stocks like Nvidia and Tesla.
He told The Journal that he’s looking to put even more of his cash into the market.
‘I am bullish on the market,’ Johnson said. ‘The euphoria everyone is feeling is warranted.’
