Is it Time to Cool Down the "Trump Trade"? Hedge Funds Warn US Stocks Won't Skyrocket

The 2024 U.S. presidential election delivered a decisive victory for Donald Trump, sparking speculation about a "Trump trade" in markets—a strategy betting on policies like deregulation, infrastructure spending, and tariffs to boost growth. But as 2025 unfolds, a growing chorus of hedge fund managers is sounding the alarm: don’t expect a repeat of the 2017–2018 rally. Instead, they argue, the current environment is far more volatile, with structural headwinds and geopolitical risks tempering optimism. Is it time to rethink the "Trump trade"? Let’s dig into the data.

The "Trump Trade" Revisited

When Trump won the 2024 election, markets initially rallied, with the S&P 500 jumping 3% in the days following his victory. The "Trump trade" thesis centered on three pillars:
1. Tax cuts and deregulation boosting corporate profits.
2. Infrastructure spending (modeled after 2021’s $1 trillion plan) spurring growth.
3. Tariffs on China and other trade partners to "protect" U.S. industries.

But reality has been messier. While the infrastructure bill passed in early 2025, it was smaller than expected ($600 billion vs. $1 trillion proposals), and delays in spending have kept the economic impact muted. Meanwhile, tariffs on Mexico, Canada, and China, announced in late 2024, have disrupted supply chains and stoked inflation fears.

Why Hedge Funds Are Skeptical

Hedge fund managers are now warning that the market’s trajectory is far from bullish. Key concerns include:
1. Sector Rotations Favor Value Over Growth
The first quarter of 2025 saw a stark reversal of 2023–2024 trends, with value stocks surging while growth stocks stumbled. The Morningstar U.S. Value Index fell only 5.06% year-to-date through April 2025, while the Growth Index plunged 17.54%. Investors are fleeing tech and communications sectors—traditional "Trump trade" favorites—due to tariff-driven economic uncertainty.

1. Tariffs Are a Double-Edged Sword
   While tariffs aim to "protect" U.S. industries, they’ve backfired on sectors like autos and semiconductors, where companies face higher input costs. For example, Ford’s Q1 earnings missed estimates as tariffs on Mexican steel forced production cuts. Meanwhile, energy and materials stocks (like Chevron and Wheaton Precious Metals) have outperformed, but they represent a narrow slice of the market.

2. Recession Risks Are Rising
   The Federal Reserve’s 2025 outlook now assigns a 40–50% probability of a recession, with GDP growth revised downward to 1.2% from 1.9%. The "Trump trade" assumes strong growth, but if the economy sputters, cyclical stocks will suffer.

Data-Backed Reasons to Cool Down

The numbers tell a cautionary tale:
- The S&P 500 fell 4.6% in Q1 2025, with momentum and growth factors lagging as investors prioritized dividends and stability.
- European equities outperformed U.S. stocks by 14% in Q1, thanks to aggressive fiscal stimulus (e.g., Germany’s €500 billion infrastructure plan), while the U.S. grapples with trade friction.
- Hedge funds underperformed, with many stuck in overvalued growth stocks. The "Magnificent 7" tech leaders (Apple, Microsoft, etc.) contributed just 23% to S&P 500 returns in late 2024, down from 60% in 2023.

The Bottom Line: Caution Ahead

The "Trump trade" is still alive, but its scope is narrower than many expect. While sectors like energy and defense may see gains, the broader market faces headwinds:
- Geopolitical risks (e.g., U.S.-China tensions) remain unresolved.
- Inflation persistence could force the Fed to delay rate cuts.
- Corporate earnings growth is slowing, with S&P 500 EPS estimates for 2025 now at 1.5%, down from 4.5% earlier in the year.

Hedge funds are right to sound the alarm. Investors chasing a "Trump rally" may be disappointed. The path forward favors dividend-paying value stocks, defensive sectors, and a dose of skepticism toward growth narratives.

In the words of one prominent manager: "The 'Trump trade' isn’t dead—it’s just a lot smaller than Wall Street hoped."

Final Takeaway: Don’t mistake a sector-specific rebound for a market-wide boom. The 2025 economy is navigating a tightrope—stay nimble, focus on quality, and brace for volatility.