As speculation grows over the potential return of Donald Trump as president, investors are contemplating the possible consequences for the stock market.

What Happened: A research note by Capital Economics suggests that a second Trump term could significantly impact inflation, interest rates, and the US dollar. These critical elements, if they surge, could pose a headwind for stock prices., reported Business Insider.

Trump is leading President Joe Biden in several polls and betting markets, making a second term for Trump a possibility.

Capital Economics’ market economist, James Reilly, believes that Trump would most likely escalate the ‘trade war’ with China and potentially impose universal tariffs on US imports, rather than repeating the fiscal expansion and tax breaks that boosted equities during his first term.

“We don’t think there is much scope for Trump to repeat the fiscal expansion and tax breaks which boosted equities during his first term in office; instead, we think the policy most likely to move markets this time would be escalating the ‘trade war’ with China and potentially imposing universal tariffs on U.S. imports,” Capital Economics’ market economist said.

Trump has hinted at implementing a 60% tariff on Chinese goods if re-elected, a substantial increase from the tariffs imposed in 2018. Such a move would likely disrupt global trade and could reverse progress made by the Federal Reserve in fighting inflation.

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Reilly suggests that Trump’s potential tariffs could cut up to 1.5% from US GDP and affect corporate profits. Furthermore, a stronger US dollar could add another headwind for stock prices, making exports more expensive.

Despite these potential hurdles, Capital Economics remains optimistic about the stock market’s performance. They believe that the AI hype bubble could outweigh these macro concerns, leading to a robust stock market in 2024 and 2025.

“So, we would be inclined to only slightly lower our S&P 500 forecast of 6,500 by end-25, if Trump won,” Reilly said. 

Why It Matters: Trump has been a significant factor in the stock market’s performance, with investors reportedly betting on his potential return to the White House. He even attributed his victory in the Iowa Caucus to a significant downturn in China’s stock markets.

However, Trump’s potential return to the presidency is also seen as a business risk by nearly half of Japanese companies, primarily due to concerns about protectionist policies. This unease is also reflected among Chinese investors, who are increasingly anxious about Trump’s potential re-election amid a struggling economy and plummeting stocks.

Trump’s possible plans to levy significant tariffs on Chinese imports if he secures a second term are a significant concern among Goldman Sachs clients in Beijing and Shanghai. This concern stems from Trump’s previous expressions of support for revoking China's "most favored nation" status for U.S. trade, potentially resulting in U.S. tariffs on Chinese goods exceeding 40%.

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