US stock investors welcome Donald Trump's return to the White House, but the post-election rebound is not without risks.

With investors betting on Trump's proposed tax cuts and regulatory easing prospects to boost the stock market, the three major US stock indices have continuously hit record highs since the US election on November 5th, until they reversed course on Tuesday.

Morgan Stanley recently outlined three major risks that could disrupt the 'Trump trade' in a report. The bank stated that first, a significant increase in US Treasury bond yields may trigger anxiety among stock investors.

Trump's election has already led to a surge in US Treasury bond yields as Wall Street expects his policies to push up inflation, keeping interest rates high. On November 6th, the yield on 10-year US Treasury bonds rose by 21 basis points to reach 4.47%.

So far, this has not been enough to dent stock market investors' confidence, but Morgan Stanley states that a further increase in bond yields could spell trouble for the stock market. The bank points out that concerns about the government's ever-expanding deficit could push yields higher.

JPMorgan analysts also agree with this view, noting that once bond yields approach 5%, the stock market rebound will weaken.

Second, a stronger US dollar may mean trouble for large cap stocks.

After the election, the Bloomberg US Dollar Index posted its largest increase in four years, reaching the highest level since November 2023.

Just like bond yields, the US dollar is soaring as market expectations that interest rates in the United States will remain at a high level for a longer period under the Trump administration. At the same time, concerns about the elected president imposing widespread tariffs on all US trade are causing foreign exchange rates to fall against the dollar.

"If the dollar continues to strengthen at the current pace until the end of the year, it may slow down the earnings per share growth of multinational companies in the fourth quarter of 2024 and 2025," Morgan Stanley wrote.

Third, stock prices are overvalued.

As investors bullish this year compete to invest in market themes related to AI, the S&P 500 index has been increasingly deviating from its fundamentals.

"More specifically, the S&P index rarely deviates this much from earnings revision on a year-on-year basis," the analyst wrote. "Again, emphasizing this is more about the major index rather than individual stocks, but it does indicate that more upside in PE ratios could depend on whether the data confirms economic growth picking up again."

Just as Morgan Stanley issued the above warning, the "Trump trade" has cooled off. The three major US stock indexes closed lower on Tuesday, as investors locked in some profits from the post-election rally and anxiously awaited this week's US inflation data. The S&P 500 index fell 0.29% to 5983.99 points. The day before, the three major US stock indexes hit new all-time highs, with the S&P 500 index surpassing the 6000-point mark for the first time.

Editor/rice