There Will Be a Trump 'Reality Check' for the Bull Market Next Week, Says This Strategist. Here’s the Trade to Make.

Stocks saw a strong start on Friday, with investors optimistic heading into the extended weekend. However, some caution could emerge later in the session, as traders brace for market closures on Monday due to the Martin Luther King Jr. holiday and anticipate political developments surrounding President-elect Donald Trump’s second inauguration.

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Daniel Von Ahlen, senior macro strategist at GlobalData TS Lombard, warns that political developments in Washington could pose risks to equities. “Stocks would likely come under pressure if Trump announces more draconic tariff measures than currently anticipated or rejects the gradual rollout of tariffs that his economic advisors have recently suggested,” he explains.

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Von Ahlen highlights that the stock market’s vulnerability stems from high investor optimism reflected in current valuations. The S&P 500 has surged nearly 60% since January 2023, driven largely by Wall Street’s earlier bearish expectations for U.S. economic and corporate earnings growth.

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In January 2023, consensus forecasts for U.S. GDP growth were a mere 0.3%, yet the economy grew at a robust 2.5%. This unexpected strength fueled a significant rally in stock prices. A similar trend occurred in 2024, as actual growth far outpaced initial predictions.

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For 2025, however, the narrative has shifted. Current forecasts predict U.S. GDP growth at 2.1%, reflecting a more optimistic outlook compared to the cautious estimates of previous years. Von Ahlen notes that this elevated optimism makes stocks more vulnerable to downside risks, especially amid heightened global policy uncertainty and stretched valuations relative to bonds.

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He also points to rising Treasury yields as a sign that stronger-than-expected growth could tighten financial conditions, creating headwinds for equities. Last week’s better-than-expected nonfarm payrolls report contributed to a rise in yields, underscoring this dynamic.

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“Stocks have continued to struggle this year,” says Von Ahlen, noting the impact of tighter financial conditions. He cites a 100-basis-point increase in U.S. 30-year Treasury yields and a 9% rise in the dollar index (DXY) since mid-September as key factors weighing on equities.

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The last time 10-year Treasury yields reached 5%, in October 2023, the S&P 500 entered correction territory. Von Ahlen cautions, “Stocks will be skating on thinner ice if the market adopts our long-held view of no Fed cuts this year.”

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To navigate these risks, Von Ahlen suggests a tactical approach. He recommends going long U.S. high-yield credit through the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) while simultaneously shorting stocks via the SPDR S&P 500 ETF Trust (SPY).

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The rationale is that, in the event of an abrupt Trump tariff announcement, stocks are likely to underperform credit due to their heightened sensitivity to economic and policy shifts. However, Von Ahlen advises employing a tight stop-loss strategy to limit downside risk in case of more conciliatory rhetoric from Trump on tariffs.

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The interplay between policy uncertainty, economic growth expectations, and financial market conditions remains a key focus for investors. While robust economic growth has been a tailwind for stocks in recent years, the prospect of elevated valuations, rising interest rates, and potential policy shocks could introduce significant volatility.

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Von Ahlen underscores the delicate balance markets must maintain. Higher yields on safer assets, such as Treasurys, present attractive alternatives to equities, which may struggle to deliver compelling returns in a tighter financial environment. This dynamic, coupled with the possibility of disruptive policy measures, heightens the importance of strategic positioning.

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As markets enter 2025, the convergence of economic, political, and financial factors will continue to shape investment strategies. Investors must weigh the potential for continued growth against the risks posed by elevated valuations, rising yields, and unpredictable policy developments. Von Ahlen’s cautious yet strategic outlook underscores the importance of navigating this complex landscape with precision and adaptability.

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