Caixin News, November 26 (Editor Xiaoxiang) Trump's victory in this month's U.S. presidential election is undoubtedly a bullish factor for the U.S. stock market, as evidenced by the recent upward trend in U.S. stocks.

However, when looking ahead, Jay Pelosky, founder and global strategist of New York investment consulting firm TPW Advisory, has different views from many current mainstream market opinions.

Pelosky believes that Trump's victory may ultimately become an important catalyst - driving the US market to end the long-standing outstanding performance compared to markets in other countries.

This may sound illogical. At least, Morgan Stanley, Goldman Sachs, JPMorgan, and many other Wall Street large institutions still predict that the U.S. stock market will continue to perform well in 2025. Some investment banks even have a target of the S&P 500 index reaching 7000 points. At first glance, these institutions' forecasts do make sense. Since hitting rock bottom during the global financial crisis in 2009, the U.S. stock market has outperformed other global markets for most of the past 15 years.

Especially since Trump entered the political stage, this trend has intensified. The weight of U.S. stocks in the MSCI All Country World Index (ACWI) has risen from around 50% when Trump took office in 2017 to over 65% today, reaching a historical high.

Investors have clearly taken note of this information recently. Retail purchases of U.S. stocks after the U.S. election are the strongest in nearly three years, while foreign investors have reached record highs in purchases of U.S.-listed ETFs. These investors may be hoping for a repeat of the Trump 1.0 era - tax cuts and deregulation driving strong economic growth and a prosperous stock market.

However, Pelosky believes that wanting to truly replicate the 'story' of the Trump 1.0 era right now might be somewhat tricky...

According to Pelosky, when Trump took office in 2017, the forward P/E ratio of the US stock market was around 16 times, lower than the long-term average level. However, now the forward P/E ratio of the US stock market is close to 23 times.

In 2017, inflation was not a major issue facing the US economy, with interest rates below 2.0% at that time. However, despite a significant decline in US inflation over the past two years, it stubbornly remains above the Fed's 2.0% target. The 10-year US Treasury yield is currently trading around 4.3% - about 200 basis points higher than in 2017.

Most importantly, the US fiscal deficit is now approximately twice the size of when Trump first entered the White House - the current deficit rate is hovering around 6% of GDP and is expected to further increase.

Pelosky points out that the specific increase in the deficit rate in the future will depend on many variables, including whether Trump truly fulfills his campaign promises. However, from the surface it might not be favorable for deficit control, as large-scale tax cuts, high tariffs, and mass deportations seem unlikely to be a cure. Given the huge deficit, high interest rates, and widespread inflation concerns, if Trump starts implementing some unconventional policies, the US market might not respond as favorably this time.

Outside the US

So, what does this mean for the other two major global markets: China and Europe?

Pelosky states that Trump's policies - especially the threat of widespread tariffs - will certainly harm global trade and growth. However, they may also act as a catalyst for the positive policy actions China and Europe have long needed.

Pelosky believes that China has taken the lead: China is already busy injecting fiscal and monetary stimulus into its economy, and importantly, it is seeking to stimulate domestic consumption while competing in advanced technology areas such as AI and electric vehicles.

In recent years, China has been continuously expanding its trading partners. In fact, China's current export volume to Southeast Asia has exceeded that to the United States. All these trends may accelerate after Trump took office.

In Europe, Pelosky mentioned that European leaders have long been aware that the EU needs to enhance its competitiveness - just look at the extensive report recently released by former ECB President Mario Draghi. However, implementing actions within a union of 27 countries often takes longer.

The fate of Europe still largely depends on Germany - the country is the largest economy in the eurozone and is the most vulnerable in the trade war. Germany is due to hold elections next year. Regardless of who wins, Berlin has enough fiscal space to stimulate the economy. The current question is whether the future German government will remove the "fiscal gate" that hinders its use of this space. The specter of Trump 2.0 could reverse the situation.

Meanwhile, according to Pelosky, several brokers predict that economic growth in Europe next year is expected to accelerate, while the opposite is true for the United States. The likelihood of the ECB's interest rate cuts being influenced by political factors is also lower compared to the Fed.

Pelosky concludes that investors currently still insist on holding US stocks. The valuation of the Chinese stock market is approaching historical lows - both in absolute terms and relative to the US market; while European stock markets are facing sell-offs because the consensus on Trump's trade dealings has resulted in a historic high valuation gap compared to the US stock market.

Pelosky states that experienced investors know that valuation gaps will not narrow on their own - what they need are catalysts, which we might actually have at the moment.