The Zhitong Finance App learned that, driven by Trump's victory and the Federal Reserve's interest rate cut by 25 basis points, the S&P 500 closed at around 6,000 points last week, up 4.7%, the biggest weekly increase in a year. US small-cap stocks also rose sharply.

Trump proposed a series of promises during the election campaign, including higher tariffs, tax cuts, deregulation, and stricter immigration laws, which brought new expectations and uncertainties to the market. Investors are actively looking for companies and industries that could benefit.

In this context, Goldman Sachs traders expect that after the end of the trading market driven by the US election, rotational pressure will continue to be a prominent feature of the market, as investors invest in companies with smaller market capitalization and seek opportunities for cyclical/inflationary themes.

Reinflation

The market has absorbed the strongest re-inflation environment in at least 24 years. Goldman Sachs strategists said that positive macroeconomic data and election results combined to drive one of the biggest monthly inflationary shifts in the asset class since 2000. In this context, Goldman Sachs is optimistic about gold and Eurobonds.

Goldman Sachs defines a shift in inflation by looking at assets associated with global economic growth (such as high-yield bonds) and assets affected by changes in monetary policy (such as government bonds).

Goldman Sachs's basket of inflationary stocks has risen about 7% since the end of September, with the highest weights being EMCOR Group (EME.US), Uber (UBER.US), and Joint Leasing (URI.US).

Goldman Sachs strategists led by Andrea Ferrario said that during the past 20 years of re-inflation, it was worthwhile to replace the bond portion of the 60/40 portfolio with alternative investments. Strategists are now bullish on gold and Eurobonds.

They said, “From now on, we will continue to be optimistic about gold because it can be used as an important hedging tool for geopolitical risks, and the Federal Reserve's interest rate cuts and continued purchases by central banks in emerging markets are also beneficial. We also continue to be optimistic about European bonds, because different macro backgrounds and potential trade tariffs should support the further widening of interest spreads between US Treasury bonds and German treasury bonds.”

Since the beginning of October, the spread between 10-year US Treasury bonds and 10-year German Treasury bonds has widened by about 30 basis points.

And since Donald Trump won the election, gold has fallen from its all-time high.

As for the stock market, Goldman Sachs strategists said that as long as the rise in bond yields is driven by more optimistic economic growth, the stock market should be able to cope with rising bond yields. They said, “If real yields (compared to actual GDP growth expectations) start to rise, or bond yields rise too fast, rising yields may eventually limit stock gains.”

Are small-cap stocks and cyclical stocks ushered in spring?

US small-cap stocks seem to be in a good position. These companies, which derive most of their revenue from within the US, will benefit from rising protectionism. Potential corporate tax cuts would also help.

Trump proposed a comprehensive tariff of 10% to 20% on imported goods and a tariff of up to 60% on goods made in China. The prospect that at least some of the tariffs will be implemented boosted the Russell 2000 Index, the benchmark for small-cap stocks, to rise 8.6% last week.

Financial stocks are also seen as being in a strong position as Trump promised to reform regulators that implement stricter banking rules under Biden. Citigroup (C.US), Goldman Sachs Group (GS.US), and JPMorgan Chase (JPM.US) shares soared after Trump's victory.

Barclays US stock strategist Venu Krishna said, “The stock market is anxious to digest Trump's domestic growth policy through small-cap stocks, and hopes to bet on deregulation through finance and big tech stocks.”

Additionally, Barclays's Emmanuel Cau analyst team said that in the absence of a catalyst to challenge a soft landing, US stocks, especially cyclical stocks, have the least resistance to rising. Historical experience shows that as long as there is no recession after the Fed's interest rate cut cycle, these assets usually rebound steadily.