Beyond the Trump Trade: US Equity Investing in a New Policy Era

26 November 2024

6 min read

John H. Fogarty, CFA| Co-Chief Investment Officer—US Growth Equities

Daniel C. Roarty, CFA| Chief Investment Officer—Sustainable Thematic Equities

Cem Inal| Chief Investment Officer—US Large Cap Value Equities; Portfolio Manager—Global Real Estate Securities

Policy changes could reshape return potential for companies across the US market. Here’s how investors can start thinking about the challenges ahead.

US stocks are widely seen as big beneficiaries of President-elect Donald Trump’s policy agenda. But policy change takes time and will have complex effects on businesses, earnings and returns. So how can investors prepare to detect risks and uncover long-term opportunities amid the uncertainty?

Whatever your views on the election, the market consensus believes the new administration is good news for American businesses and stocks. Yet while Trump will be supported by a friendly Republican Congress, translating campaign promises into policy is always difficult—and will take time.

Top-Down Change Requires Bottom-Up Research

On the campaign trail, Trump pledged to pursue policies including subsidy suspensions, extended tax cuts, new tariffs and regulatory reform. This combination of policies is likely to increase the deficit, even if economic growth is strong, which could complicate its implementation.

Politically driven change from the top down is hard to predict. For example, Trump’s plans to boost investment in the US—by incentivizing reinvestment from US companies and foreign direct investment—won’t benefit companies and industries uniformly. And while it might sound counterintuitive, we think bottom-up research—focused on company exposures to change—is the best way for equity investors to identify risks and opportunities as policy becomes reality or falls short of expectations. Even at this early stage, we can begin framing four main policy areas that will inform fundamental analysis of sectors, industries and individual companies.

Subsidies Won’t Suddenly Disappear

Subsidies provided by the Inflation Reduction Act (IRA) of 2022—a key policy move of President Joe Biden—are likely to be targeted by Trump. IRA incentives for electric vehicles (EV) and renewable energy are considered particularly vulnerable, given the new government’s stated support of fossil fuel production and criticism of environmental initiatives. While the EV subsidies may indeed be at risk, we think repealing renewable energy subsidies will be much harder to do because many sustainable infrastructure projects have created jobs in Republican states.

The IRA isn’t the only subsidy framework to watch. In fact, the Infrastructure Investment and Jobs Act (IIJA) of 2021 is three times larger than the IRA. The IIJA’s $1.2 trillion of stimulus supports a range of projects including transportation, water, energy and environmental initiatives—and only about a sixth has been released so far. Our research task as investors is to differentiate between subsidies at greater risk of being cut off and those more likely to survive.

For example, investing in critical physical infrastructure is an area of bipartisan agreement that largely transcends the US election. Deglobalization (or multishoring) is leading to manufacturing and related infrastructure (power, water, transportation) investment to support industrial development. An administration focused on accelerating domestic economic activity, by definition, will also support accelerated infrastructure investment. We believe that broad support to invest in US infrastructure could create opportunities for select companies to benefit disproportionately.

Similarly, the bipartisan CHIPS Act—aimed at strengthening the US semiconductor industry—is likely to remain mostly intact, in our view. Passed in 2022 with bipartisan support, the subsidies in this legislation are widely seen as vital to reduce US dependence on overseas technology that is considered vital to national security.

Broadly speaking, companies whose earnings depend on at-risk subsidies must be reassessed critically. In other cases, we may find opportunities in companies with solid businesses that are incorrectly perceived as being susceptible to subsidy cuts.
Tax Cuts Don’t Make Better Businesses

Trump has pledged to maintain the corporate tax rate at 21%, as per the Tax Cuts and Jobs Act of 2017. During the campaign, he also proposed potential further conditional tax cuts to 15%. Low corporate taxes may boost earnings across the board. But investors should be aware of the risks of assuming that an earnings lift from lower tax rates will support long-term profitability and equity outperformance.

Lower-quality or commodity businesses (like banking) often pass on to customers the margin pickup from lower tax rates by reducing prices. In contrast, higher-quality businesses enjoy advantages that should be accentuated in a low-tax environment. Since these companies often have strong pricing power, they can retain a tax windfall for reinvestment rather than pass it on to customers, which reinforces earnings growth potential and return power. Investors shouldn’t be seduced by a tax-induced earnings jump, but rather maintain focus on business features that support long-term return potential.
Tariffs: What Have Companies Learned?

During the campaign, Trump promised to make tariffs a central component of his trade policy. On November 25, the president-elect said that after taking office, he will issue an executive order imposing a 25% tariff on all imports from Canada and Mexico, as well as an additional 10% tariff on China. If implemented, new tariffs could incentivize American companies with overseas operations to bring production back to the US. But the impact will not always be straightforward—US manufacturers that rely on parts produced overseas could face new cost challenges if immediate domestic solutions aren’t available. These dynamics present big research questions.

Even before details are known, investors and analysts can evaluate a company’s geographic and product exposure to tariffs, to inform an appropriate response. That doesn’t only mean selling down positions at risk; in some cases, we might take advantage of temporary dislocations triggered by the headlines in companies that look likely to benefit from changing price dynamics. We can also study how individual companies managed tariff risk during Trump’s first presidency and whether their supply chain resiliency has grown since COVID. Some companies are better prepared for the changes to come, which should be reflected in their risk/reward equation.

Trade wars and tariffs widen the range of potential outcomes for companies and investors. If the risks are too severe, investors should step out of the way and avoid an industry or a company that’s in the direct line of fire of unpredictable trade moves.

If a company is vulnerable to tariffs but has an otherwise solid business, we can apply suitable discount rates that reflect a risk-aware valuation. Then, we can gauge whether the long-term reward potential compensates for those risks. Position sizes in a portfolio can also be adjusted to reflect a company’s susceptibility to tariff moves.
Regulation Can Be a Game Changer

Regulation—and deregulation—require attention in many sectors. But the outcome of regulatory change isn’t always one-dimensional. For example, if regulations on fossil fuel exploration and production are eased, that doesn’t mean renewable energy companies are doomed. In our view, renewable energy initiatives are driven primarily by improving economics rather than regulation, so companies in these industries must be analyzed on a case-by-case basis. In some cases, shares of resilient renewable energy companies may be punished over fears of unfavorable regulation, creating buying opportunities.

Looser regulatory scrutiny could remove an overhang for some mega-cap technology stocks as well as the largest US banks, and may fuel a pickup in M&A activity.

Investors must keep an eye on appointees to key positions in the Department of Justice, the Federal Trade Commission and health agencies, to start understanding how regulatory change might unfold. Robert F. Kennedy’s nomination for Secretary of Health and Human Services has raised questions about the healthcare sector, given his outspoken positions on issues such as vaccines and big pharma companies. His appointment may not be confirmed by the Senate. However, if he is appointed, investors must reassess the impact to diverse companies across the healthcare sector—from medical technology to drugmakers. As a rule of thumb, if radical regulatory change is coming, it's imperative to focus on healthcare companies with explicit business advantages that should persist, come what may.

Deregulation is a powerful force that can be a game changer for companies in diverse industries. Deciphering the potential impact of deregulation on businesses requires industry expertise and favors active management, which allows investors to position appropriately in potential winners and reduce exposure to likely losers.

Change is undoubtedly coming to US companies and stocks. In an era of dramatic upheaval, we think sticking to disciplined investing processes backed by real-time fundamental research is essential. Whether you are a growth, value or thematic equity investor, following clear principles to identify companies with strong fundamentals is the best antidote to uncertainty, in our view. With an active approach to stockpicking, portfolio construction and risk management, we believe investors can adjust to the rapidly changing environment and ensure that an allocation is positioned appropriately to capture evolving opportunities in a new US political environment.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

About the Authors

John H. Fogarty, CFA

John H. Fogarty is a Senior Vice President and Co-Chief Investment Officer for US Growth Equities. He rejoined the firm in 2006 as a fundamental research analyst covering consumer-discretionary stocks in the US, having previously spent nearly three years as a hedge fund manager at Dialectic Capital Management and Vardon Partners. Fogarty began his career at AB in 1988, performing quantitative research, and joined the US Large Cap Growth team as a generalist and quantitative analyst in 1995. He became a portfolio manager in 1997. Fogarty holds a BA in history from Columbia University and is a CFA charterholder. Location: New York

Daniel C. Roarty, CFA

Daniel C. Roarty is the Chief Investment Officer of AB’s Sustainable Thematic Equities team, which manages a suite of geographically diverse strategies aligned to long-term sustainable themes. Over the years, Roarty has played an active part in the sustainable investing community, acting as a subject-matter expert around the globe, including speaking at the 2018 Sustainable Investing Conference at the UN. He joined the firm in 2011 as global technology sector head on the Global/International Research Growth team and was named team lead in early 2012. Roarty previously spent nine years at Nuveen Investments, where he co-managed both a large-cap and a multi-cap growth strategy. His research experience includes coverage of technology, industrials and financials stocks at Morgan Stanley and Goldman Sachs. Roarty holds a BS in finance from Fairfield University and an MBA from the Wharton School at the University of Pennsylvania. He is a CFA charterholder. Location: New York

Cem Inal

Cem Inal was appointed Chief Investment Officer of US Large Cap Value Equities in 2020, after serving as portfolio manager of US Large Cap Value Equities from 2016 until 2019. He has also served as Portfolio Manager of Global Real Estate Securities since 2023. Inal was previously a senior research analyst and leader of the technology sector. He also co-managed the International Small Cap Value service from its inception in 2014 until 2016. Before joining the firm in 2003 as a research analyst, Inal was a vice president at fusionOne, a communications software provider. Prior to that, he was an engagement manager at McKinsey & Company and a research engineer at Mitsubishi Electric. Inal holds a BSE in electrical engineering from Princeton University and an MBA in financial engineering from Cornell University. Location: New York

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Beyond the Trump Trade: US Equity Investing in a New Policy Era

Top-Down Change Requires Bottom-Up Research

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