Donald Trump’s re-election as president of the United States on 5 November has stirred both optimism and apprehension in global financial markets. As his administration embarks on a policy agenda heavily focused on tax cuts, trade protectionism, deregulation, and stricter immigration policies – collectively known as Agenda 47 – investors and analysts are evaluating the implications for the economy and equity markets. This column explores the impact of Trump’s victory on financial assets and highlights how political ‘proximity’ to his agenda shaped firm-level returns.
On 5 November, Donald Trump secured a second term as president of the United States. His victory was driven by a policy agenda focused on accelerating economic growth via tax cuts, increasing tariffs and trade protectionism, enforcing stricter immigration controls, reducing government intervention, and decreasing regulation.
As Trump’s victory became evident – reflected in betting markets that rapidly incorporate election-relevant news in an information-efficient manner (Karau and Fischer 2024) – financial assets likely to be influenced by Trump’s agenda began reacting significantly (Figure 1). US 10-year Treasury yields rose sharply, increasing from 4.28% at 7:00 PM Eastern Time to 4.46% by 10:30 PM, driven by expectations of fiscal stimulus and inflationary pressures. Bitcoin prices surged as the cryptocurrency industry anticipated benefits from deregulation. The dollar index surged in response to higher expected yields and anticipated trade barriers, with larger depreciations against the dollar observed for currencies of countries likely to be significantly affected by heightened trade protectionism and stricter migration policies, such as the Mexican peso.
Figure 1 Trump’s win probability and market reaction of financial assets sensitive to the Trump policy agenda
Note: Authors’ elaborations on Bloomberg data.
The equity market’s response was equally dramatic. On 6 November, the S&P 500 posted a gain of around 2.5%, marking its strongest one-day performance following election results in over a century. Market volatility, as measured by the VIX index, plummeted by more than four points, reflecting the resolution of pre-election uncertainty and optimism about corporate earnings growth under Trump’s pro-market administration (Albori et al. 2024). Sectoral performance, however, was heterogeneous: banks, energy, and industrials – sectors expected to benefit from corporate tax cuts and deregulation – experienced the largest gains (Figure 2).
Figure 2 Post-election returns
Note: The graph displays the return of the sectoral sub-indices of the SP500 compared to the closing price on November 5th.
Source: Refinitiv.
Political proximity and firm-level returns
To assess the relationship between firm-level returns and political proximity to Trump’s 2.0 agenda (commonly referred to as Agenda 47), we construct a textual based firm-level sentiment indicator following the methodology of Hassan et al. (2019). This indicator measures the share of the conversation between analysts and firm management that centres on terms linked to Agenda 47 and, by conditioning on positive and negative tone words, provides a proxy of firms’ attitudes toward Trump’s programme. Higher sentiment scores indicate stronger alignment with Trump’s policy priorities. 1
On average, firms in the energy, financial technology, and industrial sectors exhibit higher sentiment values, while those in the renewable energy and pharmaceutical sectors show lower values, reflecting their lower likelihood of benefiting from the Trump administration’s policies (left column of Figure 3). A firm-level event study shows that firms with higher sentiment scores experienced significantly higher abnormal returns in the days following the election. We first estimate a capital asset pricing model (CAPM) for each firm over the period from 15 November 2022, when Trump announced his candidacy for a second term, to 4 October 2024, one month before the election. We then compute abnormal returns around the election date, as differences between actual returns and those predicted by the CAPM model. A one-standard-deviation increase in political proximity was associated with a 7% higher abnormal return on 6 November, with the effect persisting over the subsequent two days and peaking at around 10% (see Figure 3, right column).
Figure 3 Sectoral sentiment exposure and event study of firm-level electoral abnormal returns
Note: The left column displays the average value of the sentiment indicator by sector (Refinitiv business sector classification). The right column displays the results of a firm level event-study (beta coefficient and 95% confidence intervals). AR1=abnormal return for the first day after the event (i.e. 6/11 to 5/11); CAR2= cumulated (summed) abnormal returns for the first two days after the event (i.e. 7-6/11 to 5/11); CAR3= cumulated (summed) abnormal returns for the first three days after the event (i.e. 8-6/11 to 5/11). Estimates are based on robust standard errors.
Equity markets and real economy disconnect
While equity markets celebrated Trump’s re-election, other indicators suggest a more nuanced picture. The Economic Policy Uncertainty (EPU) index (Baker et al. 2016), derived from media coverage of policy-related terms, rose significantly in the immediate aftermath of the election, contrasting with the decline in the VIX equity volatility index (Figure 4). This divergence likely reflects differing time horizons. The decline in the VIX likely captures the resolution of pre-electoral uncertainty and anticipation of near-term policies, such as the renewal of the Tax Cuts and Jobs Act (TCJA), which is expected to face fewer obstacles in a Republican-majority Congress and boost corporate profits. On the other hand, the increase in the EPU index may reflect analysts’ uncertainty about Trump’s policies that may matter more in the medium to long term. In particular, uncertainty surrounding more controversial measures in Agenda 47, such as new tariffs and stricter immigration policies, looms large. Analysts fear that these measures could dampen long-term economic growth and exacerbate inflationary pressures (e.g. McKibbin et al. 2024, IMF 2024), even as fiscal stimulus and tax cuts provide short-term support.
Figure 4 EPU and VIX seven-day moving average
Note: Authors’ elaboration on CBOE and daily EPU data.
We also uncover a potential disconnect between the equity market responses and those implied at the macroeconomic level due to sectoral composition. In this context, assessing the effects of Trump’s election based solely on equity returns could be partially biased, as certain sectors (e.g. information technology and financials) that reacted positively to the news are overrepresented in the stock market relative to their weights in the real economy. When returns are reweighted by GDP shares, 2 the contribution of these sectors diminishes, underscoring potential disparities between financial market reactions and real economic prospects (Figure 5).
Figure 5 Sectoral decomposition of market returns (SP500 vs GDP weights)
Note: sectoral weights for the S&P500 are based on the sectoral classification of the benchmark constituents (GICS sectors weight from S&P500 factsheet); GDP weights are obtained by mapping value added by industry as a percentage of GDP to GICS sectors (data at 2024 Q2).
Conclusions
We argue that the favourable response of US equity markets to Trump’s victory should be interpreted with caution, particularly when attempting to extract meaningful signals about the real economy outlook. First, firm-level equity returns were partially influenced by firms’ political proximity to Trump’s agenda. Second, index-level returns may not accurately reflect real-economy prospects, as economic sectors’ weights in equity indices differ significantly from their contributions to GDP. Third, while equity volatility declined, measures of economic policy uncertainty increased following the election, highlighting that, especially in the longer term, there remain numerous unknowns about the implementation of Trump’s agenda.
Source : VOXeu
