Last week we were busy again with a stream of earnings results coming out of US companies. As is often the case, the results themselves were less interesting than the market’s reaction to them. On average, companies continue to report positive earnings surprises (i.e. above analysts’ expectations), but the market’s reaction has been muted, to say the least. The S&P 500 was down and the Nasdaq experienced its worst day since 2022. Meanwhile, small companies and value stocks continue to outperform. It’s very early days, but the “Great Rotation” we mentioned last week is still in play (2 weeks and counting!)

The week was also marked by the coronation of Kamala Harris as the (presumptive) democratic nominee. After the assassination attempt on Trump and Biden dropping out of the race, the roller-coaster of the US presidential election continues, and we’re still 100 days out! Aficionados of The West Wing will be disappointed though, no open democratic convention, no competitive process. It was, however, an opportunity for us to focus on geopolitics.

As with our global macro analysis, our aim is not to predict outcomes, but to assign likelihood to various scenarios and understand their market implications. We started by looking into Trump’s economic policies (he is after all still leading the polls). In his first term, Trump initiated a trade war with China and his rhetoric on the stump doesn’t suggest a willingness to ease up. Tariffs generally lead to higher inflation and therefore higher interest rates. However, let’s not overlook Biden’s trade policies over the last 3.5 years. He has done nothing to reverse Trump tariffs and has not signed a single free-trade agreement. His tone may have been different, but his actions were not. An anti-China stance seems to be a rare bi-partisan issue. Since incremental change matters more than the current state, a second Trump term could therefore not move the needle on tariffs.

Consider however the possibility that trade policy moves in the opposite direction. Trump has said in speeches that he will force Chinese car manufacturers to relocate their plants from Mexico to the US, thereby creating jobs. Always interested in “the deal”, Trump could use the threat of additional tariffs as a negotiating tactic to improve trade relations. The broader economic context is also very different now than in 2016. China is undergoing an unofficial recession and seems keen to deflate its over-indebted economy. All of this points to stable and possibly falling interest rates in the short-term.

When looking only at Trump’s trade policies, the probabilities seem to, perhaps counter-intuitively, tilt toward disinflation. However, many other factors influence inflation and interest rates. In the context of record high debt-to GDP and budget deficits, it is hard to imagine lower long-term interest rates. The “Trump trade” could therefore be a curve steepener: lower short-term interest rates and higher long ones. Food for thought.