Trump's trades are fully underway once again, with many believing the election will replay the 2016 scenario. In other words, Trump is very likely to win the presidential election next week, just like he did eight years ago. The market will soon know the results, but there are some very important differences in potential market impact.

Forecasting markets indicate that the likelihood of Trump's victory is now seen as about two-thirds, compared to less than one-third eight years ago. Therefore, what happened in 2016 was a huge surprise. There won't be such surprises this time. This also reflects extreme uncertainty about the potential consequences of Trump's presidency.

Trump 1.0's experience has reduced the market's fear of the unknown. Even though there is ample reason to believe his second term may be different from his first, the basic outline of what he plans to do remains unchanged: tax cuts, deregulation, tariffs, and immigration control reinforcement.

The difference lies in the backdrop. In 2016, inflation had been under control for many years, while interest rates were suppressed. This time is different. The following chart compares the 10-year Treasury yield in the two years before Trump's last victory with the yield in the past two years. The difference is clear:

Last time, Trump's election triggered a sharp rise in yields, but soon reached a plateau. It seems that the bond market in 2024 has already attempted a jump ahead of election day. However, the current yield levels are much higher, having recently touched 5%. The rise in yields after the last election was manageable. But in 2024, there is much less room for maneuver.

The 15-month long bull market that followed Trump's initial victory is also unlikely to fully repeat this time, partly because interest rates are higher now, and stock prices are much more expensive to begin with. Back then, $S&P 500 Index (.SPX.US)$ The trading price is about 1.8 times the sales amount, and now the trading price has more than tripled. This does not mean that stocks cannot continue to rise, but it does tend to set a lower limit on the rise.

Different interest rate positions are also reflected in the performance of small companies. Back in 2016, they performed well for most of that year, then enjoyed a significant rise after the election. This time, they have long lagged behind large technology companies. This summer, their performance showed an exciting reversal, but this reversal has gradually faded. Small companies have not been caught up in the excitement of the increase in the chances of a Trump victory.

Of course, small-cap stocks now look much cheaper, so there may be more opportunities for deep value buying. But their performance is somewhat different. This may be caused by interest rates. Compared to larger competitors, small companies have less flexibility to lock in low interest rates, their leverage ratios are often higher, and any increase in interest rates will begin to have negative effects. Morgan Stanley stock strategist Mike Wilson pointed out an interesting fact in a monthly survey of small business owners by the National Federation of Independent Business. The proportion viewing rates as the biggest problem remains historically low, but has recently seen an increase.

Then there is the issue of tariffs. This has caused market tension, as President Trump can implement these measures relatively freely, even if the Republicans do not achieve overwhelming victories in Congress. Currently, the gambling market believes this possibility is about 50%. But Deutsche Bank's George Saravelos points out, in one key area, Trump will still strengthen his protectionist hand.

Based on this, it can be imagined that all the bad news about China trade has not yet been reflected in prices. However, it is clear that the movement of stock prices is based on the assumption that tariffs will increase. Compared to 2016, this has led to another new development. The Mexican stock market was considered the only risk for a Trump victory, when the U.S. elections did not have much impact globally. However, in the past few months, a series of large foreign markets fluctuating based on the chances of a Democratic victory has been remarkable. This data shows that markets in Japan, Germany, and the United Kingdom all seem extremely sensitive to PredictIt's view of the election.

Trump himself generally denies that they will have any impact on American consumers, which should not be taken too seriously. However, the way pain spreads is much more subtle than it appears. Saravelos stated that our interpretation of the literature is that although the short-term impact of assessed tariffs is mainly borne by the United States, it is mainly through a decrease in retailer profit margins, rather than American consumers. More importantly, an assessment of the comprehensive impact on tax revenues and U.S. production would reveal that, in terms of economic costs, the impact of these tariffs is statistically insignificant. The key is that the initial impact seems to diminish over time, with the ultimate effect shifting to China.

Trump's announced policy is more aggressively increasing tariffs than the first time, which could change the situation. However, this does indicate that retailers will be the first to be impacted by the new tariffs. Clearly, the market is wise to this and has reacted accordingly. Morgan Stanley's Wilson's chart shows the performance of brand retailers most affected by potential tariffs relative to the average stock price. The smaller the company, the greater the impact:

This leads to a useful inference. Harris' victory in this regard was a surprise to the market, although not as impactful as in 2016. This means there won't be more generous corporate tax cuts, which is detrimental to the stock market. If anyone will benefit from Harris' victory, it is the retailers sensitive to tariffs who have already sold off their products. Harris will help them perform well in a potentially declining market.

Corporate profits

The mention of the word "profits" has surged. As the earnings season reaches its peak, five of the "Big Seven" will release their earnings reports in the next three days. Analysis from Bank of America on the conference call records of the earnings reports so far shows that executives are increasingly willing to use wording that implies the situation will not worsen. Its historical effectiveness as an indicator is impressive:

There are some peculiarities to the bottom of this cycle compared to the past; it occurred while corporate profits were still growing, and it has lasted for over a year. But this time, it may be more meaningful to call it a "mid-cycle slowdown" signal, as opposed to landing softly as was popularly termed in the past.

Editor/Rocky