Trump 2.0: How to navigate global markets amid policy shifts

On 1 February, Trump issued a 10% duty on Chinese imports and 25% tariffs on Canada and Mexico, with a lower 10% rate on Canadian energy exports. However, after negotiations, the tariffs on Canada and Mexico were temporarily suspended for 30 days, underscoring the evolving nature of these trade policies.

Also read | Mint Explainer: Will tariff reductions and a trade treaty with US harm India?

Financial markets responded swiftly. Global stock indices tumbled, the US dollar strengthened, and oil prices surged. The Canadian dollar plunged to a 20-year low, while the Mexican peso saw heightened volatility. These sharp reactions reinforce the need for investors to stay vigilant as markets adjust to policy shifts.

Paradoxically, despite trade tensions, Trump’s election has fuelled economic optimism — particularly among small businesses in the US. The NFIB Small Business Optimism Index surged to 105.1 in December 2024, its highest level since October 2018. The net percentage of small business owners expecting the economy to improve jumped 16 points to 52%, the highest reading since 1983. Also, 20% of small business owners now view this as a good time to expand, marking a six-point increase from the previous month.

This rising confidence could drive broader economic momentum, contrasting with the narrow, large-cap-led equity rally that has dominated markets since late 2022.

DOGE: A new regulatory paradigm

A key initiative of Trump’s second term is the Department of Government Efficiency (DOGE), designed to streamline government operations and cut regulatory burdens. This initiative could have far-reaching implications for investors across multiple sectors.

DOGE’s focus on deregulation is likely to create tailwinds for industries such as energy, manufacturing and telecommunications, where fewer regulatory constraints could boost profitability. However, sectors dependent on government contracts — such as defence and IT services — may face headwinds as DOGE scrutinises federal expenditures.

Also read: Bitter pill for Indian pharma as Trump tariffs could hurt exports by $2.25 billion

Additionally, changes in tax policy under DOGE could introduce new variables for corporate earnings and tax-advantaged investment strategies. Investors should be prepared for potential market volatility as businesses adjust to evolving regulations.

Valuations: Is large-cap dominance at risk?

Despite rising optimism, concerns about market valuations remain — especially in large-cap stocks. The S&P 500’s forward price-to-earnings (P/E) premium over the S&P 400 (mid-cap) index is at its highest level since the dotcom bubble. While today’s tech giants generate substantial cash flows, their stretched valuations warrant caution.

This valuation disparity presents compelling opportunities beyond the most widely followed names. High-quality large/mid-cap cyclical stocks, trading at more reasonable multiples, could offer attractive entry points.

Certain sectors appear poised for growth in 2025, such as industrials. The Trump administration’s industrial policies — likely emphasising deregulation and targeted incentives over green energy subsidies — could reshape market dynamics. Industry leaders have warned of potential profit declines due to rising input costs from tariffs, both domestically and globally. Investors should closely assess sector-specific risks as supply-chain disruptions and trade tensions evolve.

Investment strategy in the Trump 2.0 era

While Trump’s policies may introduce short-term volatility, the fundamental principles of long-term investing remain unchanged. Earnings growth, valuations and sector positioning should continue to guide investment decisions. However, tactical allocations may be necessary to navigate policy-driven market shifts.

Investors should consider diversifying beyond large-cap stocks, given current valuation disparities. Quality growth has been the flavour for the past two years, but quality cyclicals especially may present compelling opportunities, particularly as Trump’s policies extend economic benefits beyond the biggest corporations.

Also read: Should Trump’s latest tariff salvos worry India?

Additionally, sectors benefiting from Trump’s industrial and trade policies — along with deregulation under DOGE — could offer attractive investment avenues. However, risks remain, including renewed inflation pressures and unexpected policy reversals. A balanced, valuation-conscious approach will be key to navigating this environment.

Trump’s return to the White House is set to bring both uncertainty and opportunity. While markets may experience heightened volatility, investors who stay disciplined, diversify beyond crowded trades, and focus on fundamental growth drivers will be better positioned for the years ahead.

Arindam Mandal is head of global equities at Marcellus Investment Managers.