Today in the podcast, we run through three things in focus in our conversations following the US election. First, we review the tailwinds for US equities that we’ve been highlighting from a Trump win, along with some of the headwinds to watch out for. Second, we highlight why we think Small Caps have at least a little bit more room to run and what we’re watching to help us know when it’s time to fade the trade. Third, we review our thoughts on the old economy, value-oriented sectors that did well on Wednesday.

If you’d like to hear more, here’s another five minutes.

Takeaway #1: Tailwinds and Headwinds for US Equities Broadly Heading Into Trump’s 2nd Term

On the broader US equity market, we’ve been emphasizing the following:

• First the tailwinds. At the time of this recording, a number of House races hadn’t been declared yet, but betting markets seemed confident that Republicans would take control. While both a Republican sweep and Republican White House win with a split Congress have historically been good for the stock market, average annual S&P 500 returns have been much higher, on average following a sweep (13% vs. 5%).

• Policy is generally a tailwind in a Republican sweep. Our recent survey of RBC’s equity analysts had a modestly bullish bias in a Republican sweep due to his approach to regulation and taxes, driven by optimism on the Energy and Financials sectors.

• Thinking more broadly, we have argued that global investors will see Trump’s victory as a reason to overweight US equities.

• We’ve also been pointing out that getting past the event and alleviating some of the uncertainty around the political backdrop seemed likely to get business activity moving again.

• In terms of headwinds, investors have been concerned about Trump’s approach to tariffs and their potential inflationary impacts as well as the deficit.

• There are also indirect impacts to consider. Equity valuations seem likely to eventually take a hit if 10-year yields rise too much more. Historically, sizable moves in 10 year yields bigger than 250 basis points can trip up the stock market performance as well. On a related note, historically, big appreciations in the US Dollar can have an adverse impact on earnings revisions trends for the S&P 500.

Moving on to Takeaway #2: How Much More Room Do Small Caps Have to Run?

• Ahead of the election, we pointed out that if Trump won, particularly with a sweep, hedge fund investors seemed likely to buy Small Caps, which had become aligned with Trump’s odds in betting markets in October.

• One of the best questions we’ve been getting is how much more room Small Caps have to run. Positioning already looks a bit stretched, with Russell 2000 futures positioning per data from CFTC already close to the 2016, 2017, and 2018 highs in last week’s update, ahead of the election.

• We’ve taken a look at what happened to the Small/Large relative trade after the last two Presidential elections. Interestingly, Small Caps outperformed for a month after Trump’s 2016 victory and four months after Biden’s 2020 victory. 10-year yields moved up during those two periods of Small Cap post election outperformance as well.

Wrapping up with Takeaway #3: Which Old Economy Cyclicals Look Most Interesting Right Now?

• In our discussions of the broader rotation into these old economy sectors a few thoughts emerged.

• First, Energy came into the day with the most valuation appeal at the sector level in both Large Cap and Small Cap.

• Third, Financials was somewhere in between. Within the S&P 500, the sector has continued to look attractive on our relative P/E work but slightly overvalued on our absolute P/E model.

• Separately, We took a look at sector performance 3, 6, and 12 months after the 2016 and 2020 elections and found that Financials outperformed on a 12-month time frame after both elections within both Small Cap and Large Cap.

That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.