Trump trade turbulence: Markets brace for policy risks – Jonathan Levin

Key topics.Policy Risks Loom Large: Tariffs, tax cuts, and deficits dominate market sentiment.Magnificent 7 Stocks: Tech leaders prop up S&P 500 amid bond market jitters.Earnings and Hearings: Q4 results and cabinet picks to shape investor outlook..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here..The seventh BizNews Conference, BNC#7, is to be held in Hermanus from March 11 to 13, 2025. The 2025 BizNews Conference is designed to provide an excellent opportunity for members of the BizNews community to interact directly with the keynote speakers, old (and new) friends from previous BNC events – and to interact with members of the BizNews team. Register for BNC#7 here..If you prefer WhatsApp for updates, sign up to the BizNews channel here..By Jonathan Levin___STEADY_PAYWALL___.The US earnings season may very well prove decent, but that's no guarantee that stocks will bounce back from their recent slump. The election of Donald Trump has triggered a combination of idiosyncratic sector selloffs with bond-market volatility that's going to be hard for investors in the S&P 500 Index to escape. It will probably take signs of tariff policy moderation and a commitment to sustainable deficits to turn the stock market around. Investors should spend at least as much time watching the start of cabinet confirmation hearings this week as fourth-quarter results..Policy speculation has seen the Trump trade dominate equity markets since the November election — sometimes for better and, lately, often for worse. First, Trump is proposing a combination of tariffs, tax cuts and immigration restrictions that have pushed consumer inflation expectations higher and prompted bond traders to entertain the possibility that the Federal Reserve may have already finished cutting policy rates. There have been other factors as well — namely, stubborn inflation data, rising energy prices and an unexpectedly strong labor market — but it would be hard to deny that Trump's agenda has been a driving force behind higher yields. If he follows through on all his tax cut promises, higher-than-expected Treasury supply would be the icing on the policy-uncertainty cake..Read more: 🔒 FT: Global markets brace for the impact of a potential second Trump term.The US's high-flying tech, communications and consumer discretionary companies were able to shake off the bond-market moves initially, helped by Elon Musk's cozy relationship with the president-elect and reports of other "Magnificent 7" executives meeting with Trump at Mar-a-Lago (Alphabet Inc.'s Sundar Pichai, Apple Inc.'s Tim Cook, Amazon.com Inc. co-founder Jeff Bezos and Meta Platforms Inc.'s Mark Zuckerberg all made the pilgrimage). But the return of 10-year Treasury yields to their 14-month highs in recent days has finally hit confidence in even the strongest performers. For all their earnings strength, innovation stocks tend to exhibit "high duration," meaning their valuations hinge on cash flows expected far in the future. To the extent that traditional market relationships still hold, higher rates should imply lower fair-values for those stocks today..Second, there are few places to hide. The traditional "low duration" defensive sectors that you would typically flock to in such an environment are facing an assortment of unique policy risks. Robert Kennedy Jr., Trump's pick to lead the Department of Health and Human Services, has disparaged life-saving vaccines and excoriated the processed food industry, fanning selloffs in industries from snacks to health care. Green stocks have been falling amid concerns that the administration may roll back subsidies, and industrials continue to be the basket cases that they were before all this began. A remarkable 86% of stocks are down since the end of November, and the S&P 500 Low Volatility Low Rate Response Index is down even more than the S&P 500 itself. Short of specifically targeting the Mag 7, it would be hard for any administration to design a trickier stock-market environment..Against that backdrop, the US market is set for an interesting few weeks. Scott Bessent, Trump's pick to lead Treasury, will get a chance to clarify some of the incoming administration's policies at a confirmation hearing Thursday before the Senate Finance Committee. The nomination of the hedge fund billionaire was initially cheered on Wall Street, where fellow investors speculated he would bring professionalism to the job and refrain from supporting policies that would torpedo the market..Traders will be eager to size up his courage to occasionally push back against his boss and understand how supportive he would be of Trump's highly unorthodox tariff policies. Equally important, the market will want to hear his plans for reining in the deficit and to learn whether he plans to meaningfully increase issuance of longer-dated Treasuries. In comments last year, Bessent criticized Treasury Secretary Janet Yellen for financing relatively more of the deficit via short-term bills, but the jittery bond market could go into a full-on meltdown if Bessent signals a preference to reverse that, and adds to issuance of longer-term securities. Also this week, senators will hear from secretary of state pick Marco Rubio and attorney general nominee Pam Bondi, among others, but hearings with some of the most controversial picks, including for Kennedy, have yet to be announced. .As for earnings, the fourth-quarter reporting season will start this week with updates from the likes of JPMorgan Chase & Co., Goldman Sachs Group Inc. and Wells Fargo & Co., with the earnings drama mounting steadily through the last week of January, when 40% of the index by market capitalization is expected to report. I will be eager to hear companies' plans for handling various policy risks, but I also expect to hear a lot of humility from management in their guidance. With banks, for instance, the path ahead will depend on uncertainties around central bank policy and the yield curve, while multinational firms will face unanswerable questions about the unusual strength of the dollar and the impact of tariff changes..A key to all of this continues to be the reflexivity between Trump and the market. The president-elect may very well intend to pursue sweeping deportations and 19th century-style tariffs. Others would argue that he's trolling and trying to establish negotiating leverage with trade partners or Democrats, but there's no way to know for sure. In any case, he may not have the audacity to take the act very far if investors continue to rebel, particularly if stocks start flirting with a bear market. In the meantime, it's unlikely that even a great earnings season can ameliorate the policy uncertainty that's dominating US stocks, although a bad earnings seasons could certainly make matters worse..Read also:.🔒 Markets rally on expectations of Trump White House return🔒 The Economist: Why global bond markets are convulsingTrump tariff threat to China, Mexico and Canada roils global markets.© 2025 Bloomberg L.P.

Trump trade turbulence: Markets brace for policy risks – Jonathan Levin

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