Anticipated Outcome: Election Victory of President-Elect Donald Trump Revitalizes Opportunity for This Trillion-Dollar Investment to Propel Stock Market Growth
In 2024, no event has been more eagerly awaited than Election Day. With President Joe Biden stepping down, it was a certainty that a new leader would guide our nation over the next four years.
Although not all aspects of legislative procedures impact the stock market, elections do eventually decide which officials will shape fiscal policies on Capitol Hill. Although some aspects of Election Night are still undetermined, as of Nov. 6, the most significant question has been answered: Who will assume the presidency?
In the early hours of Nov. 6, the Associated Press declared the election for the former president and now President-Elect Donald Trump.
Remaining Policy Questions as Trump Gears up for His Second Term
During Trump's initial term as president, from his inauguration on Jan. 20, 2017, to Jan. 19, 2021, the stock market performed exceptionally well. The age-old Dow Jones Industrial Average (^DJI 0.24%), broad-based S&P 500 (^GSPC 0.77%), and growth stock-infused Nasdaq Composite (^IXIC 1.00%) respectively rose by 56%, 67%, and 138%.
However, the latter half of Trump's presidency also marked the emergence of the initial stages of the COVID-19 pandemic, leading to historically low interest rates and rounds of fiscal stimulus from the federal government. Consequently, comparing events from his first term to potential outcomes in his second is starkly contrasting.
Though Wall Street's post-election response was overwhelmingly optimistic, policy concerns and questions persist.
For instance, President-Elect Trump has expressed his desire to impose tariffs on goods imported into the U.S. Specifically, goods sourced from China, the world's second-largest economy by GDP, would be subject to a 60% tariff under Trump's proposal, while goods from all other nations would face tariffs of up to 20%.
The intended purpose of tariffs is to boost domestic production and make American-made products more competitively priced compared to imported goods. But in reality, tariffs might have unintended consequences, such as increased costs for consumers and businesses and strained trade relations with China and our allies.
There's also ongoing concern about America's rapidly escalating national debt. With Trump leaning towards low corporate tax rates, the question arises: What progress, if any, will be made in reducing the federal deficit during his second term in the Oval Office?
Despite these uncertainties, Trump's reelection sets the stage for a multitrillion-dollar investment boon for Wall Street.
Trump's Reelection Serves as a Megacatalyst for this Multitrillion-Dollar Investment
Yes, you're probably thinking this, and I'm not talking about artificial intelligence (AI). Even though the PwC analysts believe that AI will contribute $15.7 trillion to the global economy by 2030, it's unclear if the incoming Trump administration will support or hinder the AI revolution.
Although speculation abounds at this point, one of the few certain aspects of a Trump presidency is that the corporate income tax rate will not escalate. During the first term, his signature Tax Cuts and Jobs Act (TCJA) reduced the peak corporate income tax rate to 21%, the lowest it's been since the late 1930s. While Democratic Party presidential nominee Kamala Harris had proposed increasing the corporate income tax rate by 33%, this is now off the table with a Trump victory.
If the corporate income tax rate remains at rock-bottom levels, Wall Street's most powerful organizations may have a wealth of opportunities with their additional funds. This could result in hiring surges, increased research and development, and potential mergers and acquisitions.
However, in my view, the most significant impact from a Trump presidency will manifest in stock buybacks.
Before the enactment of the TCJA, quarterly stock repurchases by S&P 500 companies fluctuated between $100 billion and $150 billion, aggregately, between 2011 and 2017. But once the TCJA lowered the corporate income tax rate from 35% in 2017 to the present 21% in 2018, it became a green light for American corporations to repurchase their stock.
Excluding the initial stages of the COVID-19 pandemic, which saw some companies halt or substantially scale back their share repurchase programs, quarterly buyback activity for S&P 500 companies has regularly ranged from $200 billion to over $250 billion per quarter. In a nutshell, buyback activity has grown by 50% to 70% pre-versus post-TCJA.
Admittedly, this is a correlative analysis and does not guarantee that businesses will continue to pour massive amounts of cash into stock buybacks during President-Elect Trump's next term. Nevertheless, history tends to echo patterns on Wall Street.
Based on stats from S&P Global, S&P 500 corporations shelled out an staggering $235.9 billion on buying back their own shares during the June closing quarter. This translates to an estimated annual figure of over $943 billion. Over the past decade (ending June 30, 2024), S&P 500 constituents have collectively offloaded $7.03 trillion worth of their company's stocks, with Apple topping the list at $687.2 billion, followed closely by Alphabet ($271.4 billion), Microsoft ($195 billion), and Meta Platforms ($173.8 billion).
The appeal of buybacks lies in their ability to enhance a company's earnings per share (EPS) and make its stocks more appealing to investors. Companies with consistent or improving net income coupled with decreasing share counts will witness a steady growth in their EPS. For example, Apple has shrunk its share count by more than 42%, leading to a substantial boost in its EPS.
With an estimated $1 trillion or more in buybacks taking place annually among S&P 500 corporations during Trump's second term, there's a strong chance that this colossal investment could propel stocks to unprecedented heights.
Despite the ongoing policy concerns, such as potential tariffs and the national debt, the reelection of President-Elect Trump is seen as a catalyst for a multitrillion-dollar investment boom on Wall Street. His signature Tax Cuts and Jobs Act reduced the corporate income tax rate, which could lead to increased stock buybacks by corporations, enhancing their earnings per share and making their stocks more appealing to investors.
Given the history of stock buybacks following the TCJA, with companies like Apple significantly reducing their share count and boosting their earnings per share, there's a strong possibility that this investment could propel stocks to unprecedented heights during President-Elect Trump's second term. Additionally, the lower corporate income tax rate could provide Wall Street's most powerful organizations with an abundance of opportunities for hiring surges, increased research and development, and potential mergers and acquisitions.
