U.S. stock market "welcomes" Trump's election, which sectors are expected to soar again?

For investors, after Trump's decisive election victory, the U.S. stock market initially experienced a rebound driven by increased risk appetite, but now the market faces a challenging phase. The Republican president-elect made many promises during his campaign: raising tariffs, cutting taxes, deregulation friendly to businesses, and stricter immigration laws, among others. For investors who flooded into the stock market last week on speculation that Trump's policies would boost the economy, the challenge lies in figuring out which sectors will receive lasting support.

For example, tariffs could trigger inflation, harming large multinational companies while potentially benefiting small-cap stocks in the U.S. However, a crackdown on immigration could raise labor costs, potentially squeezing small businesses. Meanwhile, a friendly stance towards traditional energy to increase output could depress oil prices, and efforts to reverse President Biden's policies aimed at supporting the clean energy and electric vehicle industries may struggle to pass in Congress.

Eric Clark, portfolio manager at Accuvest Global Advisors, stated, "I expect active investors to start carefully screening at the industry level to see which companies and sectors may benefit now. Over time, we will gain more data points on actual implementation and how it plays out."

Clark has already seized some opportunities. As banks, industrials, energy, and large tech stocks pushed the market higher last Wednesday, he sold some tech and financial stocks. He also bought luxury retail and consumer staples stocks, which were in the red during the market surge.

More Obvious Winners

Small-cap stocks rebounded last week, appearing to be in a favorable position as traders assess the potential future policy landscape. Most of these companies' revenues come from the U.S. domestic market, and they will benefit from the rise of protectionism. Possible corporate tax cuts would also help.

Trump proposed imposing comprehensive tariffs of 10% to 20% on imported goods and tariffs of up to 60% on goods made in China. The prospect that at least some tariffs will be implemented drove the small-cap benchmark Russell 2000 index up 8.6% last week. Digital payment company Sezzle (SEZL.US) was one of the biggest gainers in the index, with its stock price doubling during this period.

Financial stocks are also seen as being in a strong position, as Trump promised to reform regulators that implemented stricter banking rules under Biden's leadership. As Wells Fargo banking analyst Mike Mayo stated, a new era of deregulation could enhance the profitability of Wall Street banks. The stock prices of Citigroup (C.US), Goldman Sachs (GS.US), and JP Morgan (JPM.US) surged after Trump's victory.

Barclays U.S. equity strategist Venu Krishna noted, "The stock market is eager to digest Trump's domestic growth policies through small-cap stocks and hopes to relax regulations by betting on financials and large tech stocks."

Industrial and machinery companies like Caterpillar (CAT.US) are expected to benefit from domestic production of energy and mining commodities. Jefferies analyst Stephen Volkmann reiterated that Caterpillar is his top pick in the industry, partly due to the company's limited business in China. He also mentioned that industrial goods distributors like Fastenal (FAST.US) and Grainger (GWW.US) have a good track record of passing on rising costs from tariff increases.

The prospect of crackdowns on immigration is a potential downside factor that investors are closely monitoring. However, some companies may benefit from this, such as private prison operators like CoreCivic (CXW.US) and GEO Group (GEO.US).

More Complex Situations

Meanwhile, some on Wall Street are skeptical about certain market trends following the election. Given Trump's pro-oil stance, traditional energy stocks, including oil and gas companies, surged significantly after his election. However, industry observers warn that efforts to relax regulations and allow more fossil fuel extraction on public lands could lead to oversupply, thereby depressing prices.

Considering that retailers generally have significant exposure to China through their supply chains, they saw a sharp decline last week, and as tariff negotiations heat up, they are likely to become targets for investors. Barclays analyst Seth Sigman stated that discount chains and home goods companies may be the most affected. He named companies such as Five Below (FIVE.US), Dollar Tree (DLTR.US), and electronics retailer Best Buy (BBY.US).

However, according to Clark, some consumer goods companies appear attractive, as any tariff increases may not affect all companies equally. He said, "I'm not too worried about high tariffs on European luxury brands like LVMH (LVMHF.US), Hermès International, L'Oréal, and Ferrari (RACE.US)."

The situation is similarly complex for another sector that was hit hard last week—clean energy and renewable energy. The iShares Global Clean Energy ETF experienced its worst week since March. However, the outlook may not be as grim. Trump has indicated his intention to repeal the Inflation Reduction Act, which aims to promote the use of clean energy, including electric vehicles, but analysts believe the likelihood of a complete repeal is low. A key reason is that the act has sparked a wave of investment in Republican districts Christopher Dendrinos, a capital markets analyst at Royal Bank of Canada, stated that the specter of this transition poses a threat to the industry as investors await clarity. He said, "On the other hand, people expect that policy changes will take a long time to pass and even longer to implement, which weakens the overall impact and may change again after another government takes office."

Dendrinos noted that other factors of Trump's policies may even benefit some stocks. The analyst expects that, given the protectionist agenda and strong domestic demand, First Solar (FSLR.US) and Fluence Energy (FLNC.US) will outperform their peers