The US equity market has generally taken a glass half-full view of Donald Trump’s election victory.
The rationale would appear to be that de-regulation, tax cuts, and a general pro-growth policy tilt should outweigh the risks from tariffs, a likely larger deficit, and the potential for a stronger inflationary pulse.
While the US market has continued to rise post-election, Europe and Emerging Markets (EM) - particularly China - have retreated, with Trump’s tariff rhetoric seemingly the principal concern. It is interesting that Australia has marginally outperformed the US post-election. Potential “safe haven” flows out of EM/Asia toward Australia may be at play in Australia’s ongoing solid performance.
Long-term interest rates have edged higher since the US election. The potential impact of rising bond yields is one of the key risk factors for equities from a Trump presidency. Equities have been relatively resilient to the rise in bond yields so far, but bond yield levels are perhaps just starting to show signs of crimping the equity advance.
The rise in bond yields was already underway in the weeks leading up to the election. Arguably, one reason for the equity market’s resilience has been that a good portion of the bond yield rise has been driven by better-than-expected economic outcomes in the US.
This can also be seen in the significant downward revision of central bank easing expected over the coming year. This has been the case for both the US and our domestic economy. At present, the US interest rate futures market has a 55% probability of a December rate cut and 70 basis points of easing priced in between today and December 2025. This means the US curve has removed ~80 bp of interest rate cuts (to December 2025) over the course of the last two months. For Australia the market now has only 45bp of easing priced in to end of December 2025, with the first cut expected somewhere between May and July next year.
Back to Data Watching for a While
While Trump’s policy platform may have implications for the medium to longer-term direction of interest rates, genuine policy detail will take some time to emerge. In the absence of such detail, the direction of interest rates in coming months will likely be determined by fundamental data flows with respect to growth and inflation data for both the US and Australia. US growth data has surprised on the upside of late, while inflation is showing some residual stickiness at the core level.
Key upcoming data points for the US include the core PCE inflation release (the Fed’s preferred measure of inflation) due on November 27, as well as the November labour market release due in early December. For Australia, the monthly CPI print for October is also due on November 27. November labour market data due in mid-December will also be closely watched.
We expect near-term macro data should be sufficiently benign to keep bond yields from rising materially in the near term. Typical seasonal patterns should also support equites into year end.
Trump 2.0 Versus 1.0. This Time Might be Different
While fundamentals may reassert their influence on the direction of the market in the near-term, it does seem that Trump’s policy platform will ultimately prove important for markets. The market appears to be taking comfort from the view that Trump’s first presidency was - for the most part - a strong period for equities. We would, however, caution that the economic and financial environment today is more challenging than when Trump first took office in early 2017. Inflation is higher, the US budget deficit is significantly worse, bond yields are higher, and equities are more expensive.
As a result, Trump may face constraints from either rising bond yields and/or a sharp fall in the US equity market. US inflation will also be closely watched (by both the administration and the market) given Trump’s political mandate has been in large part based on getting the “cost of living” down. This could mean his more extreme/populist policies may ultimately be significantly constrained.
These constraints may serve to push Trump towards an emphasis on de-regulation and moderate tax cuts, and away from populist measures such as aggressive tariffs and immigration controls.
As a result, this could prove to be a good outcome for investment markets - notwithstanding some interim volatility. Consequently, our central case view on the US equity market remains cautiously constructive. That being said, tail risks around investment market outcomes in 2025 have risen, even if the central case is that Trump ultimately moderates some of his key policy positions.
Australian Market Outlook. US Dependence?
While the direct impact of Trump’s policies for Australia is likely to be limited, Australia’s global position as a small and open commodity-exporting economy leaves it vulnerable to tail risks, particularly with respect to the performance of the Chinese economy. Separate from these risks, Australia’s own domestic growth drivers continue to look constrained - despite the share market’s relatively strong performance over the past year.
The Australian economy is in an interesting position, with the labour market still appearing strong but economic growth looking relatively weak. At the same time inflation continues to be somewhat sticky. In part, the ongoing resilience in labour market data against a soft economic growth backdrop can be explained by the predominance of government-related job creation over the past year (healthcare, aged care, education and the public service). Private sector jobs growth has in contrast been comparatively weak. Local inflation is coming under control, albeit more slowly than in many other economies. With the labour market still relatively robust in terms of aggregate jobs growth, the RBA appears in no hurry to take the risk of prematurely easing, with its commentary appearing to edge slightly more hawkish in recent months. Moderating inflation data and a softer labour market is likely over the next three to six months in our view. Consequently, a rate cut in May next year is still our base case. The prospect of at least two rate cuts next year should provide some moderate support to the local economy and equity market, but continued tailwinds from the US economy and US financial markets are likely to be needed over the coming year for decent gains in Australia in 2025.
Written by
David Cassidy, Head of Investment Strategy
David is one of Australia’s leading investment strategists.
About Wilsons Advisory: Wilsons Advisory is a financial advisory firm focused on delivering strategic and investment advice for people with ambition – whether they be a private investor, corporate, fund manager or global institution. Its client-first, whole of firm approach allows Wilsons Advisory to partner with clients for the long-term and provide the wide range of financial and advisory services they may require throughout their financial future. Wilsons Advisory is staff-owned and has offices across Australia.
Disclaimer: This communication has been prepared by Wilsons Advisory and Stockbroking Limited (ACN 010 529 665; AFSL 238375) and/or Wilsons Corporate Finance Limited (ACN 057 547 323; AFSL 238383) (collectively “Wilsons Advisory”). It is being supplied to you solely for your information and no action should be taken on the basis of or in reliance on this communication. To the extent that any information prepared by Wilsons Advisory contains a financial product advice, it is general advice only and has been prepared by Wilsons Advisory without reference to your objectives, financial situation or needs. You should consider the appropriateness of the advice in light of your own objectives, financial situation and needs before following or relying on the advice. You should also obtain a copy of, and consider, any relevant disclosure document before making any decision to acquire or dispose of a financial product. Wilsons Advisory's Financial Services Guide is available at wilsonsadvisory.com.au/disclosures.
All investments carry risk. Different investment strategies can carry different levels of risk, depending on the assets that make up that strategy. The value of investments and the level of returns will vary. Future returns may differ from past returns and past performance is not a reliable guide to future performance. On that basis, any advice should not be relied on to make any investment decisions without first consulting with your financial adviser. If you do not currently have an adviser, please contact us and we would be happy to connect you with a Wilsons Advisory representative.
To the extent that any specific documents or products are referred to, please also ensure that you obtain the relevant disclosure documents such as Product Disclosure Statement(s), Prospectus(es) and Investment Program(s) before considering any related investments.
Wilsons Advisory and their associates may have received and may continue to receive fees from any company or companies referred to in this communication (the “Companies”) in relation to corporate advisory, underwriting or other professional investment services. Please see relevant Wilsons Advisory disclosures at www.wilsonsadvisory.com.au/disclosures.