Markets aren't expecting a 'Maga' revolution

Amongst many commentators, the election of Donald Trump is being seen as the definitive break from the neoliberal globalist order that defined the world since the fall of the Berlin Wall in 1989. For Trump-supporting Republicans, this is a triumphant turning point in history. In an interview with The Free Press, billionaire venture capitalist Peter Thiel compared the Democratic Party to the French monarchy before the 1789 revolution. “It seems to me that 2020 was the fluke and it was one last time for this Ancien régime, with its Ancien President Biden, to dodder over the finish line,” he said.

On the other side, liberal supporters of the Democrat party are accepting their defeat and coming to terms with their position on the outside. In his column in the Financial Times titled Lamentations of a Lost Liberal, Simon Kuper refers to several of his ‘liberal’ friends who said they will withdraw themselves from public life. “For the first time, my feeling is: I’ll devote myself to my immediate surroundings, my family and friends, and I won’t bother with the rest,” texted one of them.

If this election is truly as revolutionary as Thiel hopes, and Kuper fears, the odd thing is it has happened against a record-high stock market. At the time of writing, the S&P 500 is up 30 per cent in the past year, 88 per cent in the past five and 683 per cent since 1996. As the graph shows, compared to 10-year average inflation-adjusted earnings, the S&P is as richly valued as it has been since the Dot Com bubble.

Despite Trump's promises of sweeping political and geopolitical change, including tariffs and deportations, the stock market has continued to move higher. The justification is the market doesn’t believe the tariffs will be as bad as promised, while corporate tax cuts are now more likely with a Republican-controlled Congress. At least, this is the view of TS Lombard head of strategy Andrea Cicione. 

However, Cicione also believes markets struggle to price in political disruption, which creates risks for "investors [and] for US equities, which are priced to perfection”. The biggest risk is Trump is genuine about his tariffs and the ensuing trade war puts globalisation into reverse. Trump has promised to put 60 per cent tariffs on all Chinese goods and up to 20 per cent on his allies. The appointment of trade hawk Robert Lighthizer to his cabinet backs up the belief Trump is serious.

For better or worse, it is easy to underappreciate the aggregate wealth that globalisation has created. An NBER paper from Northwestern University economists compared the profit margins of listed US companies before and after China was admitted into the World Trade Organisation in 2001. They found that the average annual profitability of US public companies between 2003 and 2019 increased 12 per cent compared with the pre-globalisation period (1984-2002).

Importantly this growth was primarily driven by foreign profitability increasing by 47 per cent for companies in the S&P 500. This effect was particularly pronounced for companies with the highest intensity of intangible assets. In other words, the past 20 years have been defined by US technology companies spending a lot on research and development in the US and then outsourcing production to cheap labour markets such as China, India and Vietnam.

At the time of writing, the five largest companies in the world by market cap are Nvidia, Apple, Microsoft, Amazon and Alphabet. All these companies have a high intensity of intangible assets and manufacture and sell their products abroad. Between them, their market cap is $14trn, more than the entire net worth of the UK.

It is undeniable the past 30 years have left millions of voters in the US disenfranchised. They have voted for change and expect a revolution. However, the stock market doesn’t yet believe in the credibility of the movement. Maybe it is just complacency, but stocks are priced for continuity.