Khan Capital | November 2024
Key Takeaways
- Trump’s decisive election victory triggered the most significant post-election sector rotation in modern history, with financials surging 6%, the Russell 2000 jumping 5%+, and Bitcoin spiking 8%, while clean energy stocks fell over 10%.
- The primary beneficiaries are domestically focused sectors that gain from deregulation and tax cuts: financials, small-caps, traditional energy, defence, and crypto.
- The primary losers are clean energy (subsidy risk), trade-exposed multinationals (tariff risk), and long-duration bonds (inflation and deficit risk).
- The market is pricing the benefits of the Trump agenda (deregulation, tax cuts) faster than the costs (tariffs, inflation, fiscal deficits), creating a window of vulnerability when the costs become visible.
- The Trump Trade is a rotation within equities, not a broad-based rally signal; portfolio construction should reflect both the upside in beneficiary sectors and the risks of policy execution, tariff escalation, and inflation surprise.
Donald Trump’s decisive victory in the 5 November presidential election, securing 312 electoral votes and a popular vote majority alongside Republican control of both chambers of Congress, has triggered the most significant sector rotation in US equities since the post-pandemic reopening trade. The S&P 500 rallied over 2.5% on 6 November, its best post-election day performance in history. But the headline index move understates the magnitude of the rotation beneath the surface: financials surged 6%, small-caps rallied over 5%, Tesla jumped 15%, and Bitcoin spiked 8% toward $75,000. The “Trump Trade” is not a broad-based rally; it is a repositioning of capital from the sectors that thrived under the Biden administration to the sectors that will benefit from the policy shifts of Trump 2.0.
The Winners: Deregulation, Domesticity, and Disruption
Financials. The banking sector is the clearest beneficiary of the Trump Trade. The prospect of looser capital requirements, reduced compliance costs, a more permissive approach to mergers and acquisitions, and a potential rollback of Basel III endgame rules creates direct margin and revenue benefits. JPMorgan, Goldman Sachs, Bank of America, and Morgan Stanley all posted significant post-election gains. Regional banks rallied even more sharply, as deregulation benefits are proportionally larger for smaller institutions with higher compliance costs relative to revenue.
Small-caps. The Russell 2000 surged over 5% on election day, its largest single-day gain of the year. Small-cap stocks benefit from multiple Trump policy vectors: they are primarily domestic revenue companies (insulated from tariff retaliation), they benefit disproportionately from deregulation (compliance costs are a larger burden for smaller firms), and they are the natural beneficiaries of tax cuts targeted at domestic businesses. The Russell 2000 had underperformed the S&P 500 for most of 2024; the election catalysed a catch-up trade that reflects the domestic-focused nature of the Trump agenda.
Energy. Traditional energy stocks rallied on the “drill, baby, drill” agenda: expanded federal land drilling permits, streamlined LNG export approvals, and a rollback of Biden-era environmental regulations. The Energy Select Sector SPDR (XLE) gained over 3% on election day. Pipeline companies and services firms rallied on the expectation of increased domestic production activity.
Defence. Defence contractors rallied on expectations of increased military spending and a more assertive foreign policy posture. The alignment between Trump’s “peace through strength” rhetoric and the structural increase in global defence spending (driven by the Ukraine war and rising tensions in the Middle East and Taiwan Strait) creates a bipartisan spending floor that the election result has raised further.
Crypto. Bitcoin and the broader digital asset ecosystem surged as investors priced in the most crypto-friendly US administration in history. Trump’s campaign promises included appointing crypto-sympathetic regulators, creating a national Bitcoin strategic reserve, and fostering a regulatory environment that encourages rather than restricts digital asset innovation.
The Losers: Renewables, Multinationals, and Trade-Exposed Sectors
Clean energy. Renewable energy stocks were the most prominent losers on election day. The Invesco Solar ETF (TAN) fell over 10%. Wind energy companies declined sharply. The prospect of reduced subsidies, rollback of Inflation Reduction Act incentives, and a regulatory environment that favours fossil fuels over renewables creates direct headwinds for the sector’s growth trajectory.
International and trade-exposed companies. Companies with significant revenue exposure to Mexico, Canada, and China face tariff risk that the market began pricing immediately. Auto manufacturers with cross-border supply chains, retailers dependent on Chinese imports, and agricultural exporters vulnerable to retaliatory tariffs all underperformed the broader market.
Treasury bonds. The bond market sold off sharply, with the 10-year yield rising above 4.4%. The sell-off reflected the inflationary implications of the Trump agenda (tariffs, immigration restriction, fiscal expansion) and the market’s assessment that unfunded tax cuts would increase the fiscal deficit and require additional Treasury issuance.
What the Market Is Misunderstanding
The Trump Trade is pricing the benefits before the costs. The initial rotation reflects the market’s enthusiastic pricing of deregulation and tax cuts while largely ignoring the inflationary, growth-dampening, and deficit-expanding consequences of tariffs, immigration restriction, and unfunded fiscal expansion. The costs will arrive, but they are harder to price and further away on the calendar than the benefits.
Small-cap outperformance has conditions attached. Small-caps benefit from the domestic revenue story, but they are also more sensitive to interest rates than large-caps (because they carry more floating-rate debt) and more vulnerable to an economic slowdown. If the tariff regime produces a growth scare, the small-cap trade could reverse sharply.
The dollar rally is a double-edged sword. Dollar strength supports the domestic-focused Trump Trade but creates headwinds for US multinationals (which report significant overseas earnings) and for emerging markets (which face capital outflows when the dollar strengthens). The dollar’s trajectory will be a key determinant of whether the rotation sustains or reverses.
Policy execution risk is underpriced. The market is pricing the Trump agenda as if it will be implemented exactly as promised. History suggests that campaign promises are modified, delayed, or abandoned during the legislative process. Tax reform required nearly a year of Congressional negotiation in Trump’s first term. Deregulation is slower and more incremental than executive orders suggest. Investors should maintain a healthy discount for execution risk.
Implications for Investors
The rotation is real, but position sizing matters. Financials, small-caps, energy, and defence are genuine beneficiaries of the Trump policy agenda. But the initial post-election moves have priced a significant amount of the expected benefit. Investors adding exposure should do so with awareness that the easy gains from the election surprise are behind them.
Don’t abandon mega-cap tech. The Magnificent Seven are not losers in the Trump Trade; they are simply not the primary beneficiaries. AI-driven earnings growth, cloud computing demand, and the structural position of these companies in the global economy are not policy-dependent. The risk is that mega-cap tech underperforms on a relative basis, not that it declines in absolute terms.
Fixed income positioning should favour short duration. The prospect of tariff-driven inflation, fiscal expansion, and a less aggressive Fed cutting cycle argues for shorter-duration fixed income and TIPS over long-duration Treasuries.
Bitcoin deserves a place in the conversation. The regulatory tailwind from a crypto-friendly administration, combined with the structural demand from spot ETFs and the April 2024 halving’s supply reduction, creates a multi-factor catalyst stack that makes a small allocation (1-5%) increasingly defensible for risk-tolerant investors.
Conclusion
The Trump Trade 2.0 is the market’s attempt to price a policy revolution in real time. The rotation from growth to value, from international to domestic, from regulated to deregulated, and from renewables to fossil fuels reflects a genuine reassessment of the sectors and companies that will benefit from the most significant shift in US economic policy direction in a generation. But revolutions are messy, and policy portfolios contain contradictions. The task for investors is not to chase the rotation but to position for both its continuation and its potential reversal, maintaining the diversification that allows portfolios to survive whichever element of the Trump agenda ultimately dominates.
Related Reading
For the election that created these sector opportunities, see Trump Returns: The Market’s Reaction. For the policy shifts that followed, see Trump 2.0 Begins.
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