U.S. equity markets have responded positively to the Republican “clean sweep” and Trump’s re-election. This reaction is understandable, as plans to reduce corporate taxes are projected to increase after-tax profits by 4% to 6%. Consequently, market valuations have seen little change so far.
Valuations primarily depend on long-term interest rates and future confidence. The latter has clearly improved post-election, as many Americans feel the country is heading in the wrong direction and see Trump as a leader committed to change. Trump's perceived business acumen, ability to negotiate deals, and plans to bring other successful business figures into government have boosted confidence. However, several questions remain:
- Historically, successful business leaders transitioning into politics have often underperformed, as political skills differ significantly from business acumen.
- Long-term interest rates have already risen post-election, and further increases could pressure price-to-earnings ratios.
An important factor here is