Why Has the Trump Trade Stalled?

Why Has the Trump Trade Stalled?

The Nasdaq Composite has spiked over 20,000 for the first time, as big tech is back to leading the charge higher in markets. Yet, if we get a bit more granular, we can see that there has actually been a stall in the broader market since, to be precise, Dec. 4. But why is this stalling of the “Trump trade,” i.e., the broadening of the rally, happening?

To answer this question, I turned to my go-to analyst on macro matters of this sort, Tom Essaye of Sevens Report Research. This is how Tom explained the situation, in his usual elegant and insightful manner.

By Tom Essaye, Sevens Report Research

Investors expected that the “Trump trade” was back following the November election results, and for a month, they were correct, as cyclical sectors and factors such as financials, industrials, energy, small caps and value, which should benefit most from a pro-growth Trump/Republican agenda, outperformed tech and the rest of the market.

However, since Dec. 4, the Trump trade has stalled and it’s been a return to the first half of 2024, as tech and tech-related sectors have surged and handily outperformed the rest of the markets. That two-week surge has seen the Nasdaq rise 10.5% since the election while the Dow Industrials (which has more cyclical exposure than the S&P 500) has gained just 4.3%.

As often happens in markets, price action is not following the expected script, as tech has once again resumed leadership over the rest of the market. Given this turn, it’s right to ask: Why has the Trump trade stalled and tech outperformed?

The way I see it, there are three primary reasons the Trump trade has stalled since Dec. 4, and those reasons have to do with politics, the Fed and AI.

Politics. Since President-elect Trump announced several unorthodox cabinet nominations, there has basically been an inverse correlation between cyclical stocks and the likelihood these cabinet nominations get confirmed. Prior to Trump’s announcement of Matt Gaetz as Attorney General, Pete Hegseth at Secretary of Defense, RFK Jr. as HHS Secretary and Tulsi Gabbard as National Intelligence Director, the market was marching steadily higher. However, in mid-November, those nominations caused volatility because they were seen as representing the more extreme parts of the Trump agenda (which may not be so positive for stocks).

In the subsequent weeks, “traditional” politics in Washington flexed its muscles as Gaetz withdrew his nomination, Trump chose mainstream prospect Scott Bessent as Treasury Secretary and the outlook for Pete Hegseth to stay as Defense nominee dimmed amidst allegations of inappropriate behavior. Stocks rallied into early December on the strength of “traditional” Washington, which markets welcomed as pushing back on the more unorthodox, and potentially disruptive, cabinet officials.

Since then, Trump and his camp have doubled down, and Hegseth, Gabbard and RFK Jr. have not dropped out of the process, and each is expected to make it to the confirmation hearing in early January. Trump doubling down with political capital on these choices is viewed by markets as underscoring that he is serious about the potentially disruptive parts of his agenda.

Markets want Trump and Republicans solely focused on advancing pro-growth agenda items such as tax cuts and deregulation. Anything that distracts Republicans from that goal (including party fighting about cabinet nominations) is seen as a potential negative and the progress of Trump’s unorthodox cabinet pics has, at least temporarily, undermined the Trump trade.

The Fed. Since the election, the number of expected rate cuts in 2025 has decreased from four to three (and possibly two after the December Federal Open Market Committee (FOMC) meeting). Higher rates for longer are a headwind on economic growth, which is negative for the same cyclical sectors that benefit from the Trump trade. So, as investors have reduced the number of expected rate cuts in 2025, they’ve also contemplated how higher rates will restrict growth and that, in turn, has hit cyclical sectors independently of any political developments.

Tech earnings. For much of the fourth quarter (and really the second half of 2024) the AI story had quieted, as the size of semiconductor chip company earnings beats was rather pedestrian compared to the past. So, investors began waiting for the next evolution of the AI movement, which is end-user companies espousing productivity gains and profit boost from AI implementation.

However, that changed in December. First, chipmaker Broadcom (AVGO) gave a very bullish update on AI chip demand and the stock has surged more than 30% in just a few trading days, and that’s boosted all of tech. Before AVGO results, Marvel Technologies (MRVL) also posted strong results, reminding investors of the mostly politics-neutral surging demand for anything AI related and the profit benefit that’s bestowing on the major tech companies.

The bottom line here is that the Trump trade is essentially a market term for cyclical outperformance and that cyclical outperformance has stalled given 1) Doubts about the implementation of a pro-growth agenda, 2) Expectations for higher rates and 3) Strong tech earnings.

–T.E.

The way I see it, for stocks to continue to move materially higher in 2025, we need the Trump administration to confirm the implementation of the pro-growth agenda via firm moves on deregulation on taxes. We also need to see the Trump tariff threat calm down, as any new across-the-board tariffs (which are just pernicious taxes on U.S. companies, and by extension, on you and me) are net negative to the economy and markets.

Finally, we also need the Fed to keep a rate-cutting bias. And if we get more upbeat earnings results from big tech, well, that is your recipe for a very big bull run into the new year!

For more insight of this sort from Tom Essaye and his expert team, go to Sevens Report Research.

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