Since President Trump took office in the USA, his attitude towards the "tariff stick" in the threats has been erratic, causing severe market fluctuations. This has led many investors to realize the need to adjust their stock portfolios to cope with this ongoing uncertainty, and it can no longer simply refer to the "Trump 1.0" plan.

Simply put, Trump himself remains as inconsistent as ever: first he swings the "tariff stick" at trade partners, then quickly changes course: postponing tariffs, and may even cancel the imposition later.

But apart from that, almost everything else is changing. Firstly, the tariffs he proposed will affect a broader range of goods compared to his first term. More importantly, investors are in a completely different paradigm, with increased volatility.

$S&P 500 Index (.SPX.US)$ Having previously experienced a strong upward momentum, it has cumulatively increased by 53% in 2023 and 2024, pushing valuations to a bull market high. In contrast, at the beginning of "Trump 1.0" in 2017, the S&P 500 Index had only increased by 8.7% in the previous two years, which allowed for a greater upward space for stock prices after Trump took office.

Tim Hayes, Chief Global Investment Strategist at market research firm Ned Davis Research, states that the conditions for the US stock market are different in two presidential terms, which means that a defensive approach needs to be adopted when allocating risk Assets currently.

If tariffs trigger a trade war, leading to rising Bond yields, a worsening macro environment, and a large outflow from the Technology sector and the USA market, our investment model may call for reducing stock allocation." he said.

His caution emphasizes that the macro environment is also changing: inflation is intensifying, and interest rates are much higher. Compared to eight years ago, the federal deficit is a more troubling issue. In summary, the current backdrop of the USA stock market is much more concerning, even though the economy is still thriving.

Todd Sohn, an ETF and Technology strategist at Strategas Securities LLC, stated: "We are in a high expectation environment as the bull market enters its third year, while in 2017 we had just come out of a bear market. So, when any form of weakness appears, a small catalyst could disrupt the market."

Adverse factors.

Data compiled by Mislav Matejka, head of Global Equity Strategy at JPMorgan, shows that asset management firms' exposure to Single Stock is currently over 40%. In 2017, this ratio was below 10%. This means that investors have much less "dry powder" (available funds) to buy Stocks in the coming months compared to when Trump first took office.

From another indicator's perspective, investors' expectations for the stock market have never been this high at the beginning of a presidential term. Charlie Bilello, chief market strategist at Creative Planning, stated that at the end of January, the Shiller PE was close to 38, which is an "extremely high" level.

"Historically, this means that the stock market's ROI over the next 10 years will be below average," he added.

"The Shiller PE, or cyclically adjusted PE (CAPE), is calculated using 10 years of average earnings while removing the inflation factor, whereas the regular PE is based on earnings from the past year, smoothing out the impact of economic cycles on valuation. Historical data shows that when the US CAPE exceeds 25 times, it enters a phase of 'irrational exuberance.'"

In May 2007, the CAPE of US stocks was 27.6 times, which later became the peak of this cycle, after which the global financial crisis erupted. In January of this year, the CAPE once reached 31, only lower than the peak during the market crash in 1929 (33) and the value before the stocks dropped 50% in 2000 (44).

Positioning also tells a similar story. The equity risk premium (ERP) in the USA, which measures the difference in expected returns between Stocks and Bonds, is currently deep in negative territory, something not seen since the beginning of this century. Whether this is a negative indicator for stock prices depends on the economic cycle. Lower numbers can indicate that corporate profits will rise, or they might suggest that stock prices have increased too quickly, far exceeding their actual value.

However, so far, the fourth quarter earnings report season shows an unsettling trend. Fewer US companies are exceeding earnings expectations, tariff negotiations are dominating earnings call discussions, and the outlook for 2025 has already begun to be impacted.

$Ford Motor (F.US)$and $General Motors (GM.US)$ After the Earnings Reports were released, the stock price plummeted as investors worried that these tariffs would impact this year's profits. Industrial giants.$Caterpillar (CAT.US)$It is regarded as a benchmark company amidst trade tensions. The company warned that, under demand pressure, revenues will decline, and the rising prices of the High Stock Price equipment it sells will only worsen the situation.

Strategy recommendations

Reportedly, some investors are focusing on niche markets within the stock market that have smaller valuation bubbles and more favorable historical models. For example, Scott Welch, the chief investment officer of the securities investment firm Certuity, is reallocating funds to a sector that usually shines when the Federal Reserve cuts interest rates but has been forgotten by the market: Middle Cap stocks.

"The pricing of the Magnificent 7 is perfect, so it will not cause too much damage. They have been rising because they have strong earnings and cash flow, but nothing is eternal," he said.

Analysts point out that the biggest challenge investors face in the current situation is interpreting the political winds and figuring out which direction the Trump administration will take regarding tariffs and trade policies. The lack of clarity has caused many Wall Street professionals to closely monitor everything but not take action yet.

Mark Newton, head of technical strategy at Fundstrat, stated, "We always tell investors not to focus on politics, as politics rarely has a direct impact on the stock market. There are always terrifying things that investors need to worry about each year, but overall, the stock market has remained resilient."

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