S&P 500 Soars on Trump Election; Financials and Small Caps Surge as Dollar Gains

Wall Street Rallies to New Highs as Trump Reclaims Presidency

Wall Street surged on Wednesday as Donald Trump won the 2024 U.S. presidential election, marking a stunning comeback to the White House. Major indexes reached record highs, buoyed by expectations of a pro-business agenda centered on tax cuts and deregulation, which investors believe will favor market growth. Trump’s anticipated economic policies sparked renewed interest in “Trump trades,” which drove notable gains across several sectors and asset classes.

U.S. Treasury Yields, Dollar, and Bitcoin Surge

The Republican victory fueled a sharp rise in U.S. Treasury yields as investors bet on fiscal stimulus and deregulation that could boost growth. The 10-year Treasury yield spiked, suggesting a pivot from the previously dovish monetary stance, and the dollar rallied amid expectations of Trump’s favorable stance on U.S. economic strength. Bitcoin also hit a record high, reflecting demand from investors seeking hedges against potential inflation and currency shifts under the new administration.

“This outcome wasn’t fully priced in,” stated Candice Bangsund, portfolio manager at Fiera Capital. The market, she explained, is anticipating a “red sweep” scenario, in which Republicans control both Congress chambers, amplifying the likelihood of Trump’s economic agenda passing smoothly.

Small-Caps and Financials Lead Market Gains

Small-cap stocks, represented by the Russell 2000 index, jumped 4.7%, reflecting investor confidence in domestic-focused companies expected to benefit from reduced regulatory burdens and lower corporate taxes. Sean Gallagher, head of Lazard’s Small Cap Equity Platform, projected a robust six- to twelve-month outlook for small-caps, noting their favorable positioning for a “catch-up trade” in an expanding economy.

Financials were the standout sector, with a 5.5% gain in the S&P Financials index, while the KBW bank index soared to its highest levels in four years. This reflects market confidence in the deregulation expected under Trump, especially for banks and financial institutions poised to benefit from higher interest rates.

Sector Performance Mixed as Inflation Concerns Rise

Most S&P sectors posted gains, particularly Energy, Industrials, and Consumer Discretionary, each rising around 3%. However, real estate and utilities saw declines as investors grew wary of higher inflation risks impacting interest rate-sensitive sectors. The drop in rate-cut expectations for next year added to this caution, even as the Federal Reserve is set to cut interest rates by 25 basis points on Thursday.

Despite today’s rally, Candice Bangsund cautioned that rising Treasury yields “have the potential to weigh on stock market valuations,” hinting at potential risks for highly leveraged and rate-sensitive sectors.

Market Forecast: Short-Term Bullish with Caution on Valuations

With a Republican-led government, market sentiment remains bullish in the short term as investors expect pro-growth policies. However, traders should monitor Treasury yields closely, as a rapid rise could pressure stock valuations, especially in rate-sensitive areas. Small-cap and financial stocks appear well-positioned to capitalize on deregulation and growth stimulus, while sectors reliant on lower interest rates may see headwinds if inflation pressures build.