With Trump’s victory boosting stocks, investors look for the next winners

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(Bloomberg) — For investors looking beyond the first risk-on rally in U.S. stocks after Donald Trump’s decisive election victory, now comes the hard part.

The Republican president-elect made numerous campaign promises: high tariffs, tax cuts, business-friendly deregulation and stricter immigration laws, to name a few. For investors who poured into stocks last week speculating that Trump’s policies would support the economy, the challenge is determining which sectors will get a lasting boost.

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Tariffs, for example, could trigger inflation and hurt large multinational companies, while favoring domestically oriented small-cap stocks. However, the immigration crackdown risks increasing labor costs, potentially putting a strain on small businesses. Meanwhile, a friendly stance toward traditional energy that increases production could lower oil prices, and efforts to reverse President Joe Biden’s policies aimed at helping the clean energy and electric vehicle industries may have difficulty passing Congress.

“I expect active investors will start using a scalpel to sift through sector levels to see which companies and sectors could benefit now,” said Eric Clark, portfolio manager at Accuvest Global Advisors . “Over time, we will get more data on what will actually be implemented and how to implement it. »

Clark has already seized some opportunities. While banking, industrial, energy and technology stocks pushed the stock market higher on Wednesday, it sold off some technology and financial stocks. He also bought stocks in the luxury and consumer staples sector, which were in the red amid the rally.

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Small-cap stocks rebounded last week and appear to be in a sweet spot as traders assess the potential political environment ahead. These companies, which generate most of their income in their country, risk benefiting from increased protectionism. A possible corporate tax cut should also help.

Trump proposed a general levy of 10 to 20% on imports, and up to 60% on products made in China. The prospect of at least some tariffs coming to fruition helped push the Russell 2000 index — a benchmark for small-cap stocks — up 8.6% last week. Digital payments company Sezzle Inc., one of the indicator’s top gainers, doubled during that period.

Financial stocks are also seen as being in a strong position, given Trump’s pledge to make changes to regulators that enforced tougher banking rules under Biden. A new era of deregulation could boost Wall Street profitability, according to Mike Mayo, a banking analyst at Wells Fargo & Co. Shares of Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. soared following Trump’s victory.

“Stocks are eager to incorporate Trump’s domestic growth policies through small caps and hope for easier regulation” by betting on shares of financial companies and big tech, said Venu Krishna, U.S. equity strategist at Barclays.

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Industrial and machinery companies, such as Caterpillar Inc., are poised to win by focusing on domestic production of energy and mining products.

Stephen Volkmann, an analyst at Jefferies, reiterated that Caterpillar was his top pick in the sector, pointing in part to its limited exposure to China. He also said industrial supply distributors, companies like Fastenal Co. and WW Grainger Inc., have a strong track record of passing on cost increases, particularly from higher tariffs.

The prospect of an immigration crackdown is a potential hurdle that investors are watching closely. Some companies could benefit, however, such as private prison operators such as CoreCivic Inc. and GEO Group Inc.

More confused

Meanwhile, some on Wall Street are expressing doubts about some post-election market developments.

Stocks in the traditional energy sector, which includes oil and gas companies, surged following Trump’s election, given his pro-oil stance. Still, industry observers warn that efforts to ease regulations to allow more fossil fuel extraction on public lands risk creating an oversupply that would drive down prices.

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Retailers, given their heavy exposure to China across the supply chain, fell last week, and they will likely be in investors’ crosshairs as talk of tariffs increases. Discount chains and furniture companies could see the biggest impact, according to Seth Sigman, an analyst at Barclays. It has tapped companies including Five Below Inc., Dollar Tree Inc. and electronics retailer Best Buy Co.

Still, to Clark, Accupest’s portfolio manager, some consumer companies look attractive because any rate increases likely wouldn’t be applied equally across the board.

« I am less concerned about the onerous customs duties imposed on European luxury brands, such as LVMH Moet Hennessy, Louis Vuitton, Hermes International, L’Oréal, Ferrari NV, than about those likely to be applied in China, » he said. he declared.

The situation is just as complex for another sector which was affected last week: that of clean energies and renewable energies. The iShares Global Clean Energy ETF just had its worst week since March.

However, the outlook may not be so dire. Trump has said he intends to roll back the Inflation Reduction Act – which aims to boost the use of clean energy, including electric vehicles – but analysts see little chance of a complete flashback. One of the main reasons is that the law led to a wave of investment in Republican districts.

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The specter of change will pose an overhang for the sector as investors await clarity, according to RBC Capital Markets analyst Christopher Dendrinos.

“On the other hand, expecting policy changes to take a long time to be adopted and even longer to be implemented diminishes the overall impact and could change again under another administration,” a- he declared.

Other elements of Trump’s policies might even help some actions, Dendrinos said.

The analyst expects First Solar Inc. and Fluence Energy Inc. to outperform their peers given the prospects of a protectionist agenda and strong domestic demand.

—With help from Katrina Compoli and Eleanor Harmsworth.

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