With the Republican Party's increasing dominance in Congress becoming evident, the market's expectations for the "Trump trade" are also rising.

Recently, Goldman Sachs analyst David Kostin released a report stating that a key factor driving the short-term stock market rally is the reduction in political uncertainty, which usually leads to strong year-end returns in presidential election years. By the end of 2024, the S&P 500 index will reach approximately 6015 points; investors will increase their stock holdings after the election.

Manish Kabra of Industrial Bank of France believes that the "Trump trade" is currently at its peak, and that the U.S. cyclical trade should last at least until the Inauguration Day (January 20), while stocks relying on Fed rate cuts, such as small caps, will need to be reassessed by then.

The S&P 500 index is expected to reach around 6015 points by the end of the year.

Historically, the S&P 500 index typically returns around 4% from Election Day in November to the end of the year. Goldman Sachs believes that if this trend continues this year, by the end of 2024, the S&P 500 index will reach approximately 6015 points, equivalent to a forward P/E ratio of 22 times, with growth of about 0.7% from current levels.

Analysis points out that with the resolution of election uncertainty, the recent resilience in economic growth data and continued Fed rate cuts are supporting the healthy short-term outlook for the U.S. stock market. However, there are also risks, as a further significant rise in the 10-year Treasury yield will limit stock price increases.

In September, on the day the Federal Reserve cut interest rates by 50 basis points, the yield of US Treasuries touched a low of 3.62% since the beginning of the year and subsequently rose by 80 basis points to the current 4.42%. Goldman Sachs states that under unchanged conditions, a significant rise in interest rates usually leads to a decline in stock prices. However, the S&P 500 index has risen by nearly 3% while bond yields are increasing, indicating that the stock market has absorbed this volatility, as it is primarily being driven by stronger economic data.

Goldman Sachs predicts that the Federal Reserve will cut interest rates by 25 basis points to 4.5%-4.75% at this week's monetary policy meeting, and will cut another 25 basis points at the meeting on December 18th. Goldman Sachs states:

"This should further ease financial conditions, but also raises concerns about the Fed triggering another significant inflation surge, which would steepen the yield curve further."

Currently, both the level and valuation multiples of the S&P 500 index are at historical highs. Goldman Sachs maintains its forecast for the S&P 500 index to reach 6,300 points in the next twelve months, representing an increase of about 9% from the current level. Goldman Sachs states that solid earnings growth should drive the stock market to continue appreciating next year, with projected EPS growth of 11% in 2025 and 7% in 2026, although these estimates may change with the implementation of new government policy agendas.

Analysts believe that if Goldman Sachs is correct, the market still has considerable room for growth. Bloomberg's John Authers says:

"Given the tax cuts and deregulation, Trump 2.0 is seen as favorable for growth. When growth is strong, investors will look for cheap stocks. People believe that relaxing regulations will allow them to flourish, and their balance sheets can withstand the possibility of bond yields soaring once again."

Investors are returning to the market

Recent data shows that investors have reduced stock market risk exposure before the elections, although their stock holdings are not low. Data from Goldman Sachs Prime Services indicates that hedge funds have simultaneously reduced both net leverage and total leverage in the weeks leading up to the elections.

Similarly, in recent weeks,Implied volatilityThe recent rise is consistent with the historical situation before the election, likely reflecting market hedging activities. Goldman Sachs believes that with the decline in political uncertainty, investors may return to the market, and the increase in positions may help the S&P 500 index appreciate after the presidential election.

Small cap stocks and financial sectors will outperform, while wind power stocks may underperform.

Analysis suggests that the election results will have a significant impact on short-term market rotation. Despite several months remaining until the presidential inauguration and any subsequent policy changes, recent market dynamics indicate that as expectations of a Trump victory increase from about 55% to full expectation, themes such as small cap stocks and financial sectors will outperform, while wind power stocks may underperform.

Compared to companies oriented towards international markets, stocks mainly focused on domestic revenue and supply chains in the USA show a slight correlation with the predicted market probabilities of a Trump victory. During 2018-2019, companies focused on domestic and defensive industries generally outperformed industries with higher exposure to international business, with semiconductors being the worst-performing sector. However, thanks to Nvidia's outstanding performance, the semiconductor industry is currently supporting the entire market with its astonishing profit growth.

Goldman Sachs also points out that if Trump's proposal to reduce the statutory domestic corporate tax rate from 21% to 15% is implemented, EPS (earnings per share) is expected to increase by about 4%.

Next year'sMergerActivity and cash outflows will increase.

Goldman Sachs believes that the regulatory attitude of the FTC and the antitrust division of the Department of Justice (DoJ) in the United States may be more relaxed under the leadership of the new government, and the confidence of CEOs will be a key variable influencing executives' inclination towards M&A activities. The continued economic expansion, combined with improved CEO confidence, indicates that M&A activities will increase next year.

Goldman Sachs recently released its forecast for cash outflows in the S&P 500 index in 2025, expecting cash outflows to increase from 8% in 2024 to 11% in 2025. In addition, the $4 trillion spending in 2025 will be roughly evenly distributed between cash returns to shareholders (buybacks and dividends) and investments in growth (capital expenditures, research and development, and M&A).

The cash M&A model indicates that after a 15% decline this year, M&A activities in 2025 will rebound by 20%. Goldman Sachs stated:

"The stable economy and earnings per share growth, along with a relatively loose financial environment and controllable stock market fluctuations, should support M&A activities."

Goldman Sachs also expects the number of new stock issuances to rebound in 2025. The IPO issuance index (a measure of the IPO macro environment) is currently at 137, reflecting a stable macro environment.

Trump trades are at their peak, with the "expiration date" extending at least until January next year.

Recently, the performance of the US market shows that crypto exchanges +31%, regional banks +13%, oil capital expenditure +9%, service localization +6%... Manish Kabra from Industrial Bank of France believes that 'Trump trading is at its peak', most of the rise in Trump trading is reflected in stocks, as FICC had already factored in the probability of Trump's victory before the election.

Manish said that cyclical trades in the United States should last at least until the inauguration day (January 20), while fundamental trades such as long U.S. inflow beneficiaries (SGIXUSRE) should continue to perform after the inauguration day, and stocks relying on Fed rate cuts, such as small caps, will need to be reassessed by then.