The Trump Bump Could Become the Trump Slump: What’s Happening with the S&P 500?

When Donald Trump won the 2024 presidential election, financial markets initially reacted with enthusiasm. Investors anticipated tax cuts, deregulation, and a business-friendly approach that could fuel corporate profits and economic growth. This early excitement led to a surge in stock prices, known as the “Trump bump.” However, as we near Inauguration Day on January 20, 2025, the mood on Wall Street has shifted. The S&P 500’s return since Election Day is now a mere 0.5%, and if that trend holds, it will mark the worst performance for the index during the transition from one president to another since the 2009 global financial crisis.

Let’s take a closer look at what’s behind this change and whether the Trump bump could turn into the Trump slump.

The Initial Surge: Hope for Growth

Right after the 2024 election results were in, the stock market reacted positively. Investors were excited about Trump’s return to power, believing that his pro-growth policies would provide a strong boost to businesses. Tax cuts, deregulation, and a general push to reduce government intervention were all seen as ways to help corporate America thrive.

The Dow Jones Industrial Average, for example, soared by more than 1,500 points in the trading session immediately following the election. The S&P 500 followed suit, climbing to new highs as market participants bet that Trump’s administration would be able to deliver on its promises.

But now, several months later, the situation is not quite as rosy as it seemed in the immediate aftermath of Election Day.

A Shift in Focus: Inflation and Rising Interest Rates

Since the initial surge, the focus of the financial markets has gradually shifted away from Trump’s potential economic policies and toward concerns about inflation and rising interest rates. While the idea of tax cuts and deregulation was initially appealing, the reality of sticky inflation and rapidly increasing Treasury yields has started to raise questions about the sustainability of these changes.

Excluding the one-day gain right after Election Day, the S&P 500 is actually down more than 1% in the time since the election. What started as a Trump-fueled rally has started to fizzle out, as investors now have to consider the broader economic picture.

The December Jobs Report: A Sign of Strength… or Trouble?

A recent jobs report added to the growing complexity of the situation. In December 2024, the U.S. economy added a surprisingly high 256,000 jobs, far exceeding the market’s expectations of 155,000. While this is generally seen as a sign of a healthy labor market, it also raises concerns about inflation.

When employment is strong, people have more disposable income, which can lead to increased consumer spending. But when demand rises, so too can prices, fueling inflation. For a market already jittery about rising prices, the strong jobs report has added to the uncertainty surrounding Trump’s policies.

The Path to Implementing Big Policies: More Complex Than Expected

Trump’s agenda, which includes tax cuts, deregulation, and potentially major changes to global trade (including tariffs), has always been ambitious. But with inflation concerns on the rise, many are beginning to question whether these policies are as feasible as they seemed during the election campaign.

Policymakers are now grappling with whether Trump’s economic proposals—such as widespread tariffs on imports or expansive tax cuts—will be able to make it through Congress. Even if these policies pass, there are growing concerns that they could add fuel to inflation, which could cause more problems for the economy in the long run.

Adam Turnquist, Chief Technical Strategist at LPL Financial, noted in a recent client letter that while Trump’s administration is expected to bring a “pro-growth agenda,” these policies could also have “detrimental” effects on inflation and the already-burgeoning U.S. deficit.

Inflation: The Elephant in the Room

Inflation remains one of the central challenges facing the U.S. economy. Although wages are rising and unemployment is low, the prices of everyday goods and services are also climbing, putting pressure on both consumers and businesses. This makes it harder for the Federal Reserve to keep interest rates low.

With Trump’s potential tax cuts and deregulation plans likely to add more fuel to the economy, inflation could rise even higher. If this happens, the Federal Reserve may be forced to take more aggressive action, including raising interest rates even further.

This scenario is particularly troubling for investors, as higher interest rates typically lead to lower stock valuations. Growth stocks, in particular, tend to suffer when borrowing costs rise and economic growth slows.

What’s at Stake for Investors?

For investors, the current landscape is one of uncertainty. After the initial optimism surrounding Trump’s election, there’s a growing sense that the road ahead may not be as smooth as anticipated. Inflation, rising interest rates, and the complexities of implementing Trump’s policies all create risks for the stock market.

If inflation continues to climb, the Federal Reserve may have little choice but to raise interest rates. Higher rates could lead to decreased business investment and a slowdown in consumer spending, which would likely hurt corporate profits and stock prices.

The “Trump bump” that initially gave investors hope may turn into a “Trump slump” if these economic pressures continue to build. It’s a scenario that many market watchers are keeping a close eye on as Trump prepares to take office once again.

Looking Ahead: The Fed’s Dilemma

The Federal Reserve is stuck between a rock and a hard place. On one hand, it needs to combat inflation, which means raising interest rates. On the other hand, higher rates could slow down economic growth and hurt the stock market.

This delicate balancing act means that we’re likely in for a period of volatility, especially in the early months of Trump’s second term. Investors will need to stay vigilant and ready to adjust their strategies as conditions evolve.

Conclusion

As we approach Inauguration Day, it’s clear that the markets are not as enthusiastic about Trump’s return to power as they once were. The initial Trump bump may have given way to a more cautious outlook, with inflation and rising interest rates becoming the key concerns.

For investors, the takeaway is clear: be prepared for uncertainty and volatility. While Trump’s policies may still hold potential for growth in the long term, the near-term outlook is much more complex. As always, staying informed and being adaptable will be key as the economy navigates these shifting conditions.

Whether the Trump slump is here to stay or whether the market will rebound remains to be seen, but one thing is certain: we’re in for a bumpy ride in the months ahead.

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