The market is rallying into Trump’s second presidency, as he proves the dominant driver of risk sentiment for global markets. US indices are higher across the board for another day, and the S&P 500 is tantalizingly close to December’s record high. Sentiment is strong, so this could be a record-breaking day for US stock markets.
Stocks across Europe are also rallying. The Euro Stoxx 50 index rose to a record, led by luxury and Europe’s tech names, which are benefitting from Trump’s AI investment plans. The Dax is also at a fresh record high as SAP and Munich Re rally. It is not only European indices that have reached record highs, SAP has made a record high on Wednesday and Dutch company ASML is back at its highest level since October. Although ASML is some distance away from the high reached in June 2024, the outlook for the maker of chip production technology has been boosted by President Trump and his focus on AI. More investment in AI computing, means more demand for ASML’s products, which could trigger a prolonged rally for this stock. So far, European stocks are rising on the coattails of the America’s changed economic policy, which has allowed European stocks to play catch up for now.
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Trump is also having a large impact on domestic stocks. Oracle, which will join forces with the US government to produce AI computing infrastructure, has seen its share price soar on Wednesday. In the pre-market, it is trading up 10% after a 7% rally on Tuesday. Nvidia, who may indirectly benefit from the $500bn public/ private investment, is higher by 3%. Nasdaq futures are expected to open higher by 1%, as earnings season also boosts US indices. Netflix’s share price is surging and is up nearly 15% in the pre-market, driven by record subscriber growth in Q4, and a strong outlook for 2025. Added to this, the Nasdaq does not look oversold from a technical standpoint, so this could be the start of another leg higher in the US stock market rally, even if valuations remain high.
Why the stock market rally could have legs
Another encouraging sign is that the market rally is broadening out. It’s been a long time coming, and there finally seems to be some breadth in the market. There is a growing number of companies on the S&P 500 trading above their 200-day sma. Growing market breadth, steady rates and positive earnings reports are proving a heady mix for investors.
Why the market is not concerned about Trump’s impact on the US deficit, yet…
As we move into the second Trump era, it is the new US President, and not the Federal Reserve who is dominating market sentiment. His executive orders and investment plans have had the biggest impact on stock markets. So far, he has not spooked markets with tariff threats (see more below), or with concerns about the deficit. Ahead of last year’s election, the market was concerned that Trump would boost the US deficit, and part of the Trump trade was higher bond yields. However, YTD, the 10-year Treasury yield is up only 5bps, and the pace of gains in US Treasury yields has slowed sharply.
Trump’s tax plans threaten risk sentiment
This could be because Trump has not vocalized his fiscal plans. His investment plans so far have been welcomed by the market because they are joint ventures. He has also rolled back on $300bn of green initiatives passed by Joe Biden. However, the markets have been reactionary to Trump’s policy. Right now, the focus is on growth rather than fiscal concerns, even though the budget deficit is nearly 7% of GDP. Trump has promised tax cuts, and there could be corporation tax cuts on the agenda also, which may aggravate US fiscal concerns. Wil the market consider tax cuts a pro-growth measure, which could boost stock markets further, or will they been seen as fiscally irresponsible, which might weigh on risk sentiment? This is a concern that investors need to balance in their minds as they ride the wave of euphoria in financial markets on the back of Trump’s first days back in the White House.
Tariffs: more bark than bite
Although tariffs have featured heavily in his first few days in office, tariffs for Chinese imports have been milder than feared. Trump is turning his attentions to Canada and Mexico, which could face higher tariffs than China. This is bad news for Mexico and Canada, and the MXN and CAD continue to be big under performers in the FX space so far this week. However, by levying lower tariffs than feared on China, this is less of a threat to global growth, which is more important for risk sentiment and global stock markets.
Beware sectors that Trump does not like
Trump is central to market sentiment, and this is also weighing on sectors he doesn’t like, including renewables. This is not a good time to be invested in wind tech companies, such as the Danish Vestas Wind, its stock price has fallen to its lowest level since 2018, as Trump rolls back Biden era plans for green energy. NextEra energy, one of the US’s biggest renewable energy firms, has also seen its share price fall, and its is close to its lowest level since March 2024. This suggests that foreign owned firms in sectors that Trump does not approve of could be the biggest losers, with US firms slightly more protected.
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