S&P 500 performance: Trump’s 2nd term requires a new playbook for equity investors

President Donald Trump’s mercurial approach to his signature tariffs whipsawed markets last week. And investors trying to position their equity portfolios to manage this ongoing uncertainty are finding the playbook from his first term offers little help.

What hasn’t changed is Trump’s strategy of pledging aggressive levies on trading partners and then quickly backtracking, either delaying them or canceling them completely. What has changed is basically everything else.

For starters, the tariffs he’s proposed are going to impact a wider range of goods than during his first term. But more importantly, investors are in a completely different paradigm. Volatility is higher. The S&P 500 Index is on a red-hot winning streak, rising 53% combined in 2023 and 2024 and pushing valuations to lofty bull market levels. Compare that with 2017, when the S&P was coming off a combined gain of just 8.7% over the previous two years, giving stock prices far more room to run as Trump took office.

To Tim Hayes, chief global investment strategist at Ned Davis Research, that means a defensive approach to allocating to risk assets. He said the firm’s investment model will likely call for cutting equity allocations “if tariffs produce a trade war that leads to rising bond yields, a worsening macro environment and an exodus” from the technology sector and the US markets more generally.

The caution underscores how the macro setup has changed too. Inflation is running hotter. Interest rates are much higher. And the federal deficit is a far bigger headache than it was eight years ago. Taken together, the backdrop for stocks is significantly more fraught, even as the economy hums along.

“We are in an environment of really high expectations in the third year of a bull market, whereas in 2017 we were coming out of a bear market,” said Todd Sohn, ETF and technical strategist at Strategas Securities LLC. “When you have any form of fragility, any catalyst can upset markets.”Asset managers’ exposure to equity futures is currently above the 40th percentile, according to data compiled by Mislav Matejka, head of global equity strategy at JPMorgan Chase & Co. In 2017, it was below the 10th percentile. This means investors now have less dry powder to buy equities in the months ahead than they did the first time Trump took office.By one barometer, investors’ expectations for the stock market have never been this high at the start of a presidential term. The cyclically-adjusted price-to-earnings ratio, more commonly known as the CAPE ratio, stood at nearly 38 in late January, an “extremely high” level, according to Charlie Bilello, chief market strategist at Creative Planning. “Historically, that has meant below average future returns for stocks when looking out 10 years,” he added.