U.S. stocks "returned to pre-election overnight," what comes next?

As the "Trump effect" fades, the gains in the U.S. stock market after the election have been completely erased. After Friday's close, the S&P 500 index has only risen by 0.8% since the election on November 5, which may become the weakest performance in the U.S. stock market from election day to inauguration day since Obama's inauguration in 2009.

In contrast, after Trump's unexpected election in 2016, the S&P 500 index rose by 6.2% from election day to inauguration day.

Analysts point out that this election lacked the surprises of 2016—when Trump unexpectedly defeated Hillary, igniting investor enthusiasm. In this election, although the competition between Trump and Harris was considered too close to call, the betting markets had already indicated weeks before the election that Trump might win, and investors had made early arrangements based on this.

Additionally, although Trump's policies somewhat boosted the U.S. stock market after the election, the S&P 500 index once reached a closing high of 6090.27 points on December 6, up 5.3% from election day, investors began to sell U.S. Treasuries, leading to a surge in Treasury yields.

As yields continue to rise, interest rate-sensitive sectors in the U.S. stock market, such as small-cap companies, have begun to suffer—they were once seen as the main beneficiaries of Trump's victory but have now fallen below the closing price on election day, dropping more than 10% from the peak around November 25 and entering a correction phase.

Some analysts are concerned that U.S. Treasury yields may continue to soar, while on the other hand, U.S. inflation exceeds expectations, which may lead the Federal Reserve to pause interest rate cuts or even raise rates, further impacting the U.S. stock market.

Although the Federal Reserve has cut rates by 100 basis points since September, Mizuho Securities Chief U.S. Economist Steve Ricchiuto stated, the recent negative reaction in the bond market indicates that Federal Reserve policymakers are too focused on the labor market and neglecting the inflation target, potentially losing some credibility on the inflation target. John Belton, a portfolio manager at Gabelli Funds, also pointed out:

"The recent rise in (U.S. Treasury) yields is more driven by inflation data than concerns about fiscal outlook."

Belton added that the government efficiency initiative led by Musk has alleviated market concerns about the deficit, but the uncertainty surrounding Trump's tariffs and immigration reform has somewhat exacerbated inflation worries.

Worse still, the U.S. December employment report far exceeded expectations, further weakening market expectations for further rate cuts by the Federal Reserve, leading to a surge in Treasury yields—naturally, the U.S. stock market also experienced a pullback However, despite this, some analysts remain optimistic about the prospects of the U.S. stock market. Belton believes that the fundamentals of the U.S. economy are still strong, and the relaxation of regulations, along with other policies from Trump, as well as the increasing popularity and development of artificial intelligence, are all "exciting reasons."

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