With Donald Trump and Republican majorities in the House and Senate, stock markets got what they wanted for the time being. The initial reaction on Wall Street was euphoric. History suggests that the rally could continue until the end of the year. From a statistical point of view, stock markets appreciate the clarity after US presidential elections, in some cases with sharp rises. Beyond that, things get tricky. The global economic picture is more heterogeneous than ever before. While the economic engine is humming in the USA, it is stuttering in Europe and China. For equity markets, moderate growth is better than no growth at all. In terms of geographical allocation, however, everything speaks in favor of the USA. There is no question that valuations on the other side of the Atlantic are now at levels not seen since the dotcom era. It should also be emphasized that increasing multiple expansion is also accompanied by increasing fragility in the equity markets.
While this is the main factor reducing the long-term return potential on the stock markets, we believe that the fiscal stimulus of Trump's agenda outweighs the ambitious US valuations for the time being and that an extension of the growth and financial cycle is imminent. The targeted corporate tax cut from 21% to 15%, combined with deregulation measures and the ongoing AI push, should further accelerate Corporate America's earnings momentum.
Although fiscal policy has very different effects on various US sectors, in aggregate we can assume an additional tax-related boost to earnings per share of 5% for the S&P 500. We expect a broadening of the market and a stronger focus on the value segment. In line with this, companies from the US small and mid-cap segment should also receive a tailwind. Due to their lower degree of internationalization and the resulting higher effective tax burden, they would benefit more than others from the reduction of such a tax. Furthermore, smaller companies are generally confronted with higher capital costs. A reduction in the mostly variable interest burden due to the expected lowering of the short end of the yield curve therefore also plays into the segment's hands.
The situation is more difficult for Europe. Not only are growth prospects much more subdued, but the America First principle suggests that the headline/news flow risk for Europe's stock markets is increasing. The combination of tough words, the Damocles sword of trade tariffs and global economic risks should limit the upside potential. This also applies to the domestic ATX, where the valuation gap to the European stock market has recently narrowed, but compared to the European corporate landscape, ATX companies are actually struggling with hardly growing profits.
However, it should be noted that potential fiscal policy interventions within Europe cannot be ruled out. For example, a possible stimulus package for the weakening German economy or a rescue plan for the underperforming automotive industry would trigger a significant boost for equities in the automotive sector and the auto parts industry. Their weighting in well-known indices such as the DAX is now historically low at 20%. However, it is often precisely such catalysts that help a supposed value trap, as the automotive sector has been for some time, to achieve new growth and thus support the market as a whole.
However, the upside scenarios for Europe are characterised by considerable uncertainty. In our base scenario, we therefore consider the US stock markets to have a more attractive risk/reward ratio, so we recommend overweighting US equities over European stocks over the next 12 months.
Author:
Helge Rechberger
Senior Equity Market Analyst
Raiffeisen Research / Raiffeisen Bank International
13 January 2025
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Note
Wiener Börse AG would explicitly like to point out that the data and calculations given in this report are historic values, which do not permit any conclusions as regards future developments or value stability. Price fluctuations and loss of capital are possible in securities trading. The contribution is the personal opinion of the analyst and does not constitute a financial analysis or a recommendation for investment by the exchange operating company, Wiener Börse AG.