Investing.com — In a recent note to clients, Bank of America strategists delved into the economics of the “Trump trade,” examining how the election outcome has spurred dramatic market reactions and may shape the economic landscape in multiple ways.
Following Trump’s win in the 47th US presidential election, markets saw sharp increases across equities, Treasury yields, and the US dollar, reflecting investor expectations of significant policy changes.
BofA said its US economics team outlined “three clear lessons” from these market reactions.
First, the market expects a substantial increase in tariffs, a factor that has contributed to higher breakeven inflation, particularly at the short end of the yield curve.
“Markets appear to be anticipating a large increase in tariffs in the near term which is evident from not only the rally in the dollar, but also the fact that the pickup in breakeven inflation was much more pronounced at the front end of the yield curve than at the long end,” strategists led by Derek Harris explained.
Second, BofA highlights the likelihood of a structural shift toward higher policy rates in the medium term.
This view is based on expectations that Trump’s fiscal policies, likely to include increased government spending, could lead to higher Treasury issuance and a wider federal deficit. The prospect of these actions has raised nominal and real yields, especially at the longer end of the curve, as investors anticipate that the Federal Reserve may lean against what BofA calls “a chronically easy fiscal stance.”
Third, strategists underscore how Trump’s deregulatory agenda is fueling the equity rally, particularly within the Financials and Energy sectors.
Their analysis suggests that the significant movement in these sectors indicates investors’ enthusiasm for anticipated regulatory rollbacks. Financials, noted as “the biggest winner of the day,” and energy stocks saw substantial gains on hopes of a friendlier regulatory environment.
“As we have previously flagged, these sectors are likely to be the beneficiaries of deregulation under Trump,” strategists note. “The size of yesterday’s move suggests that markets are looking for a significant tailwind from changes in the regulatory landscape.”
According to BofA, the Trump trade has implications across sectors. For smaller-cap companies, which BofA believes could be disproportionately affected by tariffs, rising rates, and labor cost inflation, the outlook may be mixed.
However, M&A opportunities for SMID banks, IT, and healthcare could lend some support to these sectors.
Meanwhile, industries reliant on imported goods or labor, such as construction and restaurants, could face pressure from tariffs and tighter immigration policies, which could increase costs in these labor-intensive sectors.