Market Surge: Trump's Pledges Fuel U.S. Stock Rally

In an abbreviated trading session following Thanksgiving, U.S. stocks rallied on Friday, primarily driven by post-election optimism and the artificial intelligence investing craze. Donald Trump's election victory on November 5, 2024, and his pledges of tax cuts, deregulation, and import tariffs have supercharged investors' expectations for U.S. and Wall Street stocks. This enthusiasm has led to a significant rally in the S&P 500, which notched an impressive 5.14% gain in November 2024, marking the benchmark index's 16th gain in 17 weeks.

The U.S. tech sector, in particular, has benefited from this optimism and the AI investing craze. Morgan Stanley Research estimated that AI-driven productivity could add 30 basis points to next year's net profit margins for S&P 500 companies, with particular opportunities in services-oriented sectors like software and services, consumer services, and financial services. This excitement about AI's potential to boost earnings and productivity has likely driven investor enthusiasm for tech stocks.

However, it's essential to consider that these potential gains may already be priced into stocks' valuations, and margins could face pressure from a stronger U.S. dollar, higher interest rates, and input inflation. As Morgan Stanley's Global Investment Committee noted, these factors may finally be drying up, and liquidity may be nearing exhaustion. Thus, investors should remain cautious and actively seek out stocks and credit with solid fundamentals that support their valuations.

In addition to AI excitement, Japan's rate hike speculation and yen rebound significantly impacted the dollar's depreciation. The dollar fell 1.25% on the day to 149.65 yen, its lowest level since October 21, as investors anticipated Japanese rate hikes and inflation data in Tokyo came in hotter than expected. This pressure, combined with the Fed's dovish stance, drove the dollar index lower by 0.26% to 105.79. The euro, supported by higher euro zone inflation data, recovered from its post-election losses and gained 1.25% for the week.

Investors reacted to Trump's proposed import tariffs on Mexico, Canada, and China with caution, leading to a decline in Asian and emerging market stocks. The MSCI broadest index of Asia-Pacific shares outside Japan showed a 2.35% loss for the month of November 2024, with Tokyo's Nikkei 225 index easing 2.23% despite not being a direct tariff target. This reflects investors' concerns about the potential impact of protectionist policies on global trade and economic growth.

As investors navigate this dynamic market environment, they should prioritize risk management, informed market predictions, and thoughtful asset allocation. Focusing on companies with robust management and enduring business models, such as those in the energy sector, can provide a solid foundation for a balanced portfolio that combines growth and value stocks. By adopting a strategic and informed approach, investors can capitalize on the opportunities presented by the current market landscape while mitigating risks.