Written by Christophe Brauns, Investment Director at Capital Group
President-elect Donald Trump’s victory and the potential for a vastly different regulatory environment boosted markets already primed by a broadly solid third-quarter earnings season.
Given the change in US leadership, separating the winners and losers of Trumponomics 2.0 is front and centre for many investors.
At the ground level are questions about how specific industries and companies will fare. There are clues from recent third-quarter earnings reports that could help investors prepare for what’s next.
1. Banks may benefit, but prospect of higher rates clouds outlook
Banks are expected to benefit under a Trump administration as regulations around capital requirements are likely to loosen.
Mergers are also expected to attract less antitrust scrutiny from officials, which could speed up the time it takes to close transactions. An increase in deal-making would be positive for the banking industry since many provide advisory services as well as debt to help with financing.
One recent earnings report showed that big banks are in good shape. Of note, debit and credit card spending rose 6% at JPMorgan, the largest US bank. Consumers remain strong, and that will likely continue unless we see labour markets weaken.
Concerns about increased government spending and the potential impact to inflation have pushed yields on longer dated Treasuries higher over the past few months. The benchmark 10-year Treasury yielded 4.34% on 7 November 2024, from a level of 3.78% on 30 September 2024.
Rates are likely to continue to decline over the next year as the Federal Reserve seeks a normalised rate environment.
2. Leaders emerge amid challenges in the automotive industry
US automakers’ stock prices jumped on Trump’s victory as investors digested the potential impacts of fewer environmental regulations and looser monetary policy. However, autos are also a prime target for potential tariffs given how globalised their supply chains are, and a trade war with Europe or China could lead to market dislocations. The backdrop heading into the election was already challenging for automakers as demand has chilled. Weak sentiment is largely due to high interest rates and elevated prices, which have pushed the average monthly payment on a new vehicle in the United States to around $730.
General Motors’ operational rigour allowed them to better navigate the soft demand environment. GM has been disciplined about controlling their cost structure, keeping price discounts smaller than those of peers in key segments like large pickup trucks, and rigorous about capital allocation. In their 3Q 2024 earnings release, GM raised their full-year profit guidance and now expects to sustain that higher profitability in 2025.
Structural change is also brewing beneath the surface in the automotive market. While electric vehicle (EV) growth has stalled recently and the fate of regulatory incentives for EV adoption is uncertain under the next administration, carmakers are still making headway on improving their EV model lineups.
Tesla, for example, plans to launch new models in 2025, including a more affordable vehicle, and legacy carmakers are hoping to dramatically improve the unit economics of their EVs in the years ahead. On first principles, an EV lends itself to a cheaper build cost compared to combustion vehicles, since the EV has roughly 90% fewer moving parts. Unlocking that at scale, however, requires deep engineering and manufacturing expertise, and most OEMs are still early in that learning curve.
In parallel, autonomous robo taxis from Alphabet-owned Waymo — which have gone mainstream in cities such as San Francisco and Los Angeles — continue to grow their customer base as they expand operations to additional cities like Austin and Atlanta.
3. Luxury slowdown could continue before recovering
American shoppers may be more willing to buy high-end brands now that the election is over, however, the growth rate may be substantially slower than during Covid-19.
Despite a potential turnaround of sales in the US, investors will likely remain on edge about the near-term earnings potential for luxury companies. That’s because Chinese buyers, who typically purchase around 33% of luxury goods sold globally, are spending less. It will likely take time for consumer confidence in China — which underpins spending habits — to return given wage declines, travel restrictions and steep losses in property values.
A renewed trade war could mean higher tariffs at a time when luxury brands have hit a temporary wall in pricing power. In the past, companies passed on tariffs to consumers via price increases but given slower macro conditions globally, brands cannot increase prices as aggressively as they have in the past.
Lackluster style innovation has also hurt sales for some luxury goods companies. Niche brands like Miu Miu, owned by Prada, are taking risks with their products, but that hasn’t yet translated to the industry overall. Additionally, brands like Chanel and Louis Vuitton, once exclusive, are now so common that customers may not be as eager to purchase their products.
There are a lot of moving pieces right now and certain things are just unclear. Sometimes you must be comfortable with not knowing exactly what you’re going to do as an investor. There will be winners and losers under the Trump economy, but there are also opportunities that stretch beyond administrations.
