3 Developments That Could Derail the Post-Trump Stock Market Rally, BofA Warns

The stock market has been riding high since Donald Trump's election win, with investors pricing in strong profit growth. However, Bank of America (BofA) has identified three potential headwinds that could disrupt this ongoing rally. Let's dive into these risks and explore how they could impact your portfolio.

1. **Economic Recession**: A recession is not BofA's base case, but it's a real possibility under Trump. If the incoming administration prioritizes immigration curbs and protectionist trade policies over fiscal easing, the economy could sink into recession. This would significantly undercut earnings growth, drawing S&P EPS down 10% to 20%. Peak-to-trough profit drawdowns of 20% are typical in an average recession, which could see EPS drop to $195-$220 next year.


2. **Trade War**: Trump's proposed 10% tariff on all foreign imports could trigger a 10% hit to EPS, with industrials and semiconductor stocks most at risk. If Trump stays true to his word, US foreign sales could take a 3% to 4% hit as the rest of the world establishes retaliatory tariffs. In a mounting trade war, these industries could face substantial headwinds.

3. **Bond Yield Surge**: A dramatic upswing in bond yields could slash EPS by another 10%. BofA's worst-case scenario involves the 10-year Treasury yield surging to 7%, which could prompt an inflation shock if Trump's tariff and immigration reductions spark a manufacturing base contraction. Higher bond yields could weigh on equity exposure and increase pressure on stocks once the 10-year rate rises above 5%.


As an investor, it's crucial to stay informed about these potential risks and adjust your portfolio accordingly. While the post-Trump rally has been fueled by optimism, it's essential to maintain a balanced perspective and consider the potential headwinds that could derail the market's gains. By keeping an eye on these developments and diversifying your portfolio, you can better navigate the ever-changing investment landscape.