Shares could be “protected” from the sharp drop by Trump: BofA

US stocks have looked sluggish at times in recent weeks as rates rise and debate over whether the Federal Reserve will cut interest rates in 2025 sent the S&P 500 (^ GSPC) at their lowest levels since the election.

But a better-than-expected inflation reading on Wednesday helped U.S. markets rally, and Bank of America investment strategist Michael Hartnett believes further downside in the S&P 500 will be “protected” by President-elect Donald Trump in the coming months.

During his first term as president, Trump saw the stock market as a barometer for the success of his own administration. The expectations of many investors are that Trump will remain sensitive to a pullback in US stocks during his next turn.

And while the tariffs are a concern for investors and corporations, other policies of Trump can be a positive for the stock market.

Deregulation has been seen as a boon for banks and could encourage more business after a few challenging years. The more crypto-friendly administration sent this pocket of the market growing, and lower corporate tax rates could help corporate profits in all industries. of Trump”America First” mantra he also has has boosted optimism among small businesses and it could also be seen as a tailwind for small-cap companies.

Hartnett cautions, however, that other factors such as the high valuation and market concentration seen in the index – with only 10 stocks making up almost 40% of the index — likely also put a cap on the upside for the S&P 500.

And a question remains if the demonstrations in some “Trump stocks” such as small capital, energy and financial stocks will be held after the election. only to get most of their earnings back leading up to the inauguration.

Hartnett added that if Trump 2.0 and a drop in rates cannot send the Russell 2000 to small caps (^RUTH) sustainable index above its 2021 high, asset allocators are likely to reduce their overweight position in stocks.

In general, strategists agree that Trump’s policies it could also be a tailwind for the US stock market but I do not believe that these gains will come in a straight line.

“January’s volatility ahead of Trump’s 1/20 Inauguration reinforces the core view of a more volatile year ahead,” Julian Emanuel, who leads the equities, derivatives and quantitative strategy team at Evercore ISI , he wrote in a note to clients Thursday night.

Emanuel, who sees the S&P 500 ending 2025 at 6,800, or about 13% higher than current levels, still maintains that the Trump administration will lead to a continued swing between “risk on” and “risk off” sentiment between the investors.

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