With the U.S. election now behind us, the outcome was resolved more swiftly than we anticipated, avoiding the prolonged process many had expected. The equity market’s initial reactions were overwhelmingly positive with expectations of lower corporate tax rates and less regulation.

Sectors that had lagged the A.I./tech rally over the past couple of years saw the largest gains. The broad themes in stocks that rallied the most were less regulation, lower taxes, and likely higher, long-term interest rates. While there is currently short-term support for less regulation, it will be harder than anticipated to push through all the tax cuts that President-elect Trump wants due to a likely narrow Republican majority in the House. The prospect of higher tariffs will be a focus by mid-2025. Some wins, like appointments and looser regulations, will be easier to come by. Others, such as aggressive tax cuts with a ballooning debt, will be harder to achieve.

There is short-term momentum around areas of the stock market that haven’t seen the success of the A.I. trend and we are likely to continue to see further investment in infrastructure to support the massive amount of energy needed to run the investment in A.I. Longer term, we will continue to deal with the likelihood of a higher level of inflation and higher long-term interest rates.

Rates

The Federal Reserve is likely to continue to reduce rates in the coming year, though there will be questions around how much. Shortly after the election, markets have been pricing in two to three less cuts through 2026. Trump’s proposals to increase tariffs and cut taxes are likely to be inflationary. It will be several months into 2025 before we get a good sense of what proposals are legitimate and what are considered a bargaining position. Tariffs can be implemented with executive orders, so the market may price in a decent probability that some tariffs will be implemented. It looks likely that there will be a Republican sweep in Congress, so the odds of tax cuts are rather good. With a small margin in the House, some fiscally oriented members of Congress may negotiate to limit the increase in the deficit that will come with lower rates. We are likely to see the longer end of the yield curve remain elevated as the Fed continues to cut short-term interest rates.

Equity

We have seen a rally in stocks that are predicted to do well under a Trump presidency. Less regulation and lower corporate tax rates are the primary driver. As mentioned, financials, industrials, and small cap equities fit the bill. At the other end, we see stocks exposed to a trade war (consumer staples) and higher interest rates (real estate, utilities) as underperforming. Coming into the election, many fund managers have reduced risk and are now in a position to quickly ramp up. Others are caught short some of the winners and are forced to unwind those trades. The magnitude of the rally in financial stocks has been tremendous, with many regional bank stocks up over 15% post-election. While not sustainable, there is room for values to increase if bank regulations are to be loosened and merger activity picks up.

Small cap stocks have been underperformers until recently. They have been kept in check due to a heavy reliance on floating rate debt, so higher interest rates have been a big drag. Going forward, lower short-term interest rates and the possibility of being shielded from and benefiting from higher tariffs is a tailwind. The likelihood of a strong dollar makes international stocks not as attractive, but valuations continue to be favorable.

Currency and Commodities

If policies around tax cuts, tariffs, and immigration reform are implemented, we will likely see inflation run higher than expected. A higher rate of inflation will translate into higher relative rates and a stronger dollar. Widening deficits will make commodity prices more attractive, especially gold. Energy prices may not go up as more supply could hit the market with less restrictions on drilling. On the immigration front, many of the jobs that are filled by this group of workers are in the service and agriculture sectors. With deportations, we could see pressure on wages to fill these jobs.

Investment Positioning

We continue to see a growing economy and the opportunity for innovation. In our equity allocation, we favor domestic over international and are beginning to look at adding small/mid cap exposure relative to large cap. Overall, we see a broadening out of the market versus the concentration of winners over the past 12 to 18 months. In terms of fixed income, we prefer to stay in the five-to-six-year duration range with short-term interest rates declining while longer-term interest rates remain higher. We prefer to invest in private credit relative to publicly traded high yield and corporate bonds. In our hedge fund strategies, we continue to like exposure to inflation sensitive strategies as well as long/short managers.

Moving Forward

As we navigate through the end of 2024 into 2025, we don’t foresee election results changing much in the near term. The primary things we will be watching are how much of Trump’s plan can actually get implemented and will Fed policy begin to change if the decline in inflation stalls out. As always, we continue to remain focused on our long-term positioning.

This report has been prepared from sources and data believed to be reliable but not guaranteed to or by Synovus Trust Company, N.A. (STC). Opinions expressed are subject to change without notice. Synovus Trust Company, N.A. has prepared and presented this report for the sole usage of its clients as information and is neither an offer to sell nor a solicitation of an offer to buy any security.

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