Ralph Schlosstein, the honorary chairman and former CEO of Evercore Inc., a well-known investment institution on Wall Street, recently stated that the return of former US President Donald Trump to the White House will inevitably bring huge risks to the US stock market. This is also one of the core reasons why the S&P 500 index and the Nasdaq composite index, which are dominated by the 'Big Seven' technology giants, have been declining recently. The current market is actively pricing in the possibility of the 'King of Understanding' Trump returning to power, which could mean a 'loose fiscal policy + trade protectionism' MAGA policy tone.

The sell-off of technology stocks in the US stock market has led to the worst trading day for the S&P 500 Index and Nasdaq Composite Index in more than a year on Wednesday, known as "Black Wednesday". The seven technology giants led by Nvidia and Microsoft have experienced the most tragic decline recently, and these seven giants occupy a high weight in the S&P 500 Index and Nasdaq, which is also the main reason for the recent continuous decline of these two indices.

On Wednesday, the benchmark stock index of the US stock market, the S&P 500 index, suffered its worst single-day decline since December 2022, dropping 2.3%. In the previous 356 trading days, the index had not fallen by more than 2%. The astonishing resilience of the S&P 500 index even set a record for the longest in 17 years. The Nasdaq and the Nasdaq 100 index, which are dominated by technology stocks, both fell by more than 3.6% at the close of US stocks, setting the largest sell-off since October 2022.

On Thursday, the S&P 500 Index and Nasdaq fell for three consecutive days, while the small-cap benchmark index, the Russell 2000 Index, has continued to outperform the S&P 500 Index since July. This means that under the expectation of Fed rate cut, market funds have continued to rotate to small-cap stocks that have suffered long-term price declines. Besides the concerns about the AI profitability prospects and high valuations of the tech giants, the panic-selling has worsened due to the negative expectation of adding tariffs brought by the "knowing king".

"MAGA Wind" has not yet come, but it has blown to Wall Street.

In an interview with the media, former Evercore CEO Schlosstein said that the tariffs proposed frequently by the former president Trump, including the imposition of a 10% tariff on goods imported from other countries and levying a tariff of up to 100% on goods imported from China, will harm the US stock market, especially the valuations of tech giants, since these tariffs may accelerate inflation and trigger the EU's excuse for imposing a digital service tax on large US tech companies.

Schlosstein said in an interview: "In the context of the global economy not realizing full expansion, tariffs will exacerbate the risk of a global trade war, which obviously does not conform to the interests of global growth or the market." "Among the policy proposals of the two parties' candidates, this is the most unfavorable for the market."

Recently, the "Trump trade" has swept Wall Street, pushing up yields on US bonds with various maturities. For Schlosstein, the return of Trump to the White House may mean that the yield indicators will be discounted at a higher risk-free rate, thus severely damaging the asset valuations of stocks and transforming them into lower stock prices.

The "MAGA Wind" of the "knowing king" has fully swept Wall Street. These top institutions have used real money to embrace stocks that are expected to benefit from the "MAGA" policy in the long term, and have sold heavily those stocks whose valuations may be suppressed by the "MAGA" policy.

Investors in the financial market generally believe that Trump's attack event will be one of the most important turning points in the US election, which will strengthen Trump's political leadership image and lay the foundation for his return to the White House in November. Especially among the voters who support Trump, he is regarded as one of the historical heroes who unite American voters. In the eyes of some GOP supporters who do not support Trump, the fact that Trump avoided bullets under the "blessing of God" means that he is the only next president.

Since President Biden's poor performance in the presidential debate has boosted Trump's election prospects, the "Trump Trade" has swept the global market on Wall Street. The coverage of the "Trump trade" is very broad, and traders and strategists generally agree that in the context of the MAGA policy-that is, the election of Trump will stimulate inflation combined with loose fiscal policies and greater trade protectionism-they bet on the strengthening of the US dollar, the rise in US bond yields, and the profits of industrial giants in the United States, as well as rising stocks of banks, medical care, and energy, without exception, these assets have rebounded against the trend in recent wave of "Trump trade."

MAGA, the English abbreviation for "Make America Great Again," can be used to refer to the tone of all policies of the Trump administration, and is also used by some mainstream media to refer to Trump himself and enthusiastic American voters who support him.

Larry Fink, co-founder of BlackRock Inc., the world's largest asset management institution, recently said that although the Federal Reserve is unlikely to directly raise interest rates in response to Trump's tariffs, if inflation eventually soars, there is no rule out the possibility of eventually returning to interest rate hikes, which will be another blow to the US stock market and even the global stock market.

John Lynch, Chief Investment Officer of Comerica Wealth Management, believes that Trump's aggressive rhetoric and biased attitude toward large technology companies, coupled with his advocacy of trade protectionism policies, may further damage the valuation of large technology giants and many technology stocks that benefited from the artificial intelligence boom.

David Woo, CEO of David Woo Unbound, pointed out that if Trump is re-elected and starts imposing tariffs on every country, this would be very detrimental to the US stock market. He said that high tariffs may provide an excuse for Europe and the G20 to collectively levy a digital service tax on US technology giants, triggering a trade conflict between the US and Europe, which could seriously affect all US companies, especially the "Seven Big Tech Giants."

US fiscal policy is not sustainable

Former Evercore CEO Schlosstein also said in an interview that the ever-expanding budget deficit and how the US government solves this problem are also crucial for the future of the US stock market.

"It is obvious that our fiscal policy is completely unsustainable," Schlosstein said. "At present, the two parties in the United States seem to have no special emphasis on how to solve this core issue," he added, Trump-led policies, especially tax reduction policies, are expected to significantly increase the size of the deficit.

"In some ways, the ultimate outcome may be ugly," he pointed out. He also mentioned that in 2011, S&P Global Ratings downgraded the United States' sovereign credit rating, which put huge pressure on the US financial market. "A global trade war or a weak dollar may trigger a withdrawal of foreign investors from US Treasuries, which may cause another credit rating downgrade."

At the same time, both parties in the United States have largely ignored the potential impact of immigration policies. Schlosstein said in an interview: "If Trump chooses to expel these immigrants, it will have a very bad negative impact on the US economic growth, because it is precisely the wide labor force and productivity improvement that helped the US economy surpass Europe and Japan."

However, Schlosstein believed that the possibility of a US economic recession next year is not high. "As long as the US economy and corporate profitability are good, the US stock market will continue to rise, and the Fed's first rate cut will boost the stock market," he said in an interview. "In the end, the driving force that keeps the market going is the strong economic fundamentals and the strong earnings prospects of companies, not who the president is."

Editor/new