Stock investors are ignoring economists' bleak forecasts about US President-elect Donald Trump's economic policies, betting instead that his plans will boost corporate profits and push the market higher.
Wall Street S&P 500 Index rose to record levels last year, and despite the recent decline, stock strategists have Expected gains By about 10 percent for the index this year on the back of strong growth in profits.
This optimistic tone contrasts sharply with recent warnings from economists about the potential damage from Trump's protectionist policies, which, they say, could hurt economic growth and raise interest rates. Economic inflation And limit the Federal Reserve's ability to lower interest rates.
Some attribute this sharp division to differing views on the extent to which Trump will implement his plans, doubts about the impact of GDP growth on the profits of the major technology groups that are driving the market rally, and different time periods for measuring the effects of the new president’s policies.
“I think economists are taking too much of what Trump says he's probably going to do,” said Evan Brown, portfolio manager and head of multi-asset strategy at UBS Asset Management. “Investors are betting, rightly or wrongly, that Trump won't follow through with nearly as much.”
recently Opinion polls conducted by the Financial Times It found that more than half of the 47 economists surveyed on the US economy expect “some negative impact” of Trump's policies, with a tenth expecting a “significant negative impact” and only a fifth expecting a positive impact.
Many focused on the risks posed by two of Trump's prominent policies: trade tariffs and restrictions on immigration to the United States.
“If you channeled an economist and looked at this new era as a glass half empty, those would be the A and B I would point to,” said Jurian Timmer, director of global macroeconomics at Fidelity. “But the market is looking forward to earnings.”
Analysts expect S&P 500 earnings to grow 15 percent in 2025, according to data compiled by FactSet, up from about 9 percent last year. Net profit margins are expected to expand to their largest levels in a decade.
A number of fund managers said it was still too early to change their earnings forecasts, given the uncertainty about the policies Trump will implement or the impact they will have in practice.
“Immigration will initially target border control and criminal elements, but with many new immigrants actually leaning toward the Republican Party…we suspect there will be mass deportations,” said Barry Bannister, chief equity strategist at Stifel.
He added that the tariffs are also likely to be targeted rather than the sweeping tariffs threatened by Trump, which are intended to boost US exports and inward investment in US manufacturing.
The conflicting views among economists and investors may also stem from either of Trump's two main campaign pledges – “Make America Great Again” through tariffs and restrictions on immigration, Reducing the federal government Both groups believe they will dominate the next four years, said Jason Draho, head of asset allocation for the Americas at UBS Global Wealth Management.
He added that MAGA “favors labor” overall, while deregulation “favors capital.” He added: “The more (deregulation) Trump's Economic 2.0 policies lead to, the more positive the investment outlook will be.”
Some also point to the historical lack of correlation between economic growth and stock market returns as confirmation that even if growth suffers, this does not necessarily lead to a bear market.
“There's a lot more to giving you a positive return in the stock market than just economic growth,” said Kevin Kang, chief economist at Vanguard.
Trump's pro-business stance is expected to encourage companies to invest, which could help non-tech sectors boost their profits as well.
“You can see that some companies that were reluctant to make investment decisions before are more willing to do so now,” said Rick de los Reyes, portfolio manager at T Rowe Price.
The Big Seven's profits are expected to grow 21 percent this year, down from 33 percent in 2024. That's still ahead of other sectors, but by less this year, with profits for the other 493 members of the Standard & Poor's index expected to rise. 500. It is growing 13 percent this year, up from 4 percent, according to FactSet.
Ultimately, it is possible to prove that both economists and investors are right, but over different time periods. Investors tend to think short-term, with the market often looking to upcoming earnings and the possibility of tax cuts on the horizon. Over a longer period of time, economists may rightly remain concerned about whether cutting taxes will worsen the federal budget deficit or about the potential damage to GDP growth caused by tariffs and restrictions on immigration.
“Loose fiscal policies that support the economy in the near term could also lead to a recovery and widening deficits in the medium to long term,” said Mitch Resnick, head of the London fixed income group at Federated Hermes.
