Investors have been closely focused on the U.S. election in recent weeks, with Donald Trump elected 47th president of the United States. Both U.S. and Canadian equity markets reached new all-time highs after a post-election boost, while markets overseas have trended lower. Amid this election rally, U.S. economic data has largely surprised to the upside.
Equity markets often rally as uncertainty recedes, which likely explains some of the recent market gains. Rather than the close and potentially contested outcome many feared, Donald Trump was decisively announced as president in the early hours following election night. Markets may also be enthused by the potential for deregulation and tax cuts to spur higher growth and offset any potential drags from proposed immigration reforms and tariffs. These sentiments were echoed by companies reporting earnings after the election.
In addition to winning the White House, the Republican party secured control of both chambers of Congress. With a majority in both the Senate and the House of Representatives, Trump should face less resistance in advancing his agenda. However, that does not necessarily mean he has a blank check. Republicans can still vote to oppose certain policies and push for concessions. The financial markets can also function as an important feedback mechanism, with bond markets having sometimes reacted sharply to major shifts in fiscal policy. While it is important to appreciate the potential impact of a new government, I think central banks, the economic cycle, and corporate earnings growth tend to have more influence on investor returns over time.
The U.S. third-quarter earnings season is nearly complete and has been less remarkable than recent quarters, though markets appear unfazed. Company profits grew around 8%, roughly double expectations. And earnings are forecasted to grow by nearly 13% year-over-year in 2025, the strongest pace since 2021. Encouragingly, more of this growth is expected to come from a wider swath of sectors, suggesting a broadening in the earnings story and less reliance on the large-cap tech sector. Moreover, pro-growth policies from the new administration may further support earnings next year.