MW The bull market faces a Trump 'reality check' next week, says this strategist. Here's the trade to make.

By Jamie Chisholm

Stocks are very vulnerable to news of harsher-than-hoped-for tariffs

Futures indicate a positive open for stocks on Friday. But caution might creep in as the session progresses as traders eye the extended weekend.

Markets will be closed on Monday for the Martin Luther King Jr. holiday, the same day President-elect Donald Trump gets inaugurated for a second time.

However, the political theater in Washington could mark a problem for equities, according to Daniel Von Ahlen, senior macro strategist at GlobalData TS Lombard.

"Stocks would likely come under pressure should he announce more draconic tariff measures than currently discounted or push back against the idea of a more gradual roll-out of tariffs, which his economic advisor team has recently suggested," says Von Ahlen.

The reason the stock market is so vulnerable to such a scenario, says Von Ahlen, is because valuations currently imply investor optimism.

He notes that one of the main reasons the S&P 500 has gained almost 60% since January 2023 was that Wall Street held relatively bearish expectations for U.S. economic and earnings per share growth.

"U.S. recession call[s] dominated in both 2023 and 2024, which meant the bar for beating those expectations was relatively low. Indeed, in January 2023 the consensus forecast for U.S. growth stood at just 0.3%, while growth turned out to be 2.5%, fueling a massive surge in stock prices," Von Ahlen says in a note published this week.

Similarly, the current estimate for U.S. growth in 2024 is more than twice what was expected at the beginning of that year.

However, at 2.1% the current consensus estimate for U.S. GDP growth in 2025 is notably more optimistic than that seen over the last two years. This "suggests greater vulnerability for stocks at a time when global policy uncertainty is elevated, and valuations (relative to bonds) have become even more expensive," says Von Ahlen.

In addition, the rise in Treasury yields after the nonfarm payrolls report of a week ago shows that better-than-expected growth will deliver tighter financial conditions, which will weigh on stocks.

"Stocks have continued to struggle [this year], suggesting that overall tighter financial conditions (+100 basis points on U.S. 30-year yields, +9% on the DXY [dollar index] since mid-September) are increasingly causing problems for equities, as higher yields on safer assets become available," says Von Ahlen.

He notes that the last time 10-year Treasury yields hit 5% - in October 2023 - the S&P 500 entered correction territory. "Stocks will be skating on thinner ice if the market adopts our long-held view of no Fed cuts this year," he says.

To take into account the risk of an imminent Trump tariff shock hitting such a vulnerable market, Von Ahlen suggests the following trade. Going long U.S. high-yield credit in the form of the iShares iBoxx $ High Yield Corporate Bond exchange traded fund HYG, and going short stocks, using the SPDR S&P 500 ETF Trust SPY, "as stocks would likely underperform credit in this scenario."

However, he suggests a tight stop on the trade (a predetermined level at which a losing position will be closed) "in the event of more conciliatory rhetoric from Trump on the tariff front."

Markets

U.S. stock-index futures (ES00) (YM00) (NQ00) are higher as benchmark Treasury yields BX:TMUBMUSD10Y dip. The dollar index DXY is up, while gold (GC00) is trading around $2,705 an ounce.

   Key asset performance                                                Last       5d      1m      YTD    1y 
   S&P 500                                                              5937.34    0.32%   1.20%   0.95%  24.19% 
   Nasdaq Composite                                                     19,338.29  -0.72%  -0.18%  0.14%  28.45% 
   10-year Treasury                                                     4.606      -16.30  8.70    3.00   47.48 
   Gold                                                                 2731.1     0.50%   3.43%   3.48%  34.42% 
   Oil                                                                  78.25      2.19%   12.46%  8.88%  6.56% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor's Business Daily.

The buzz

U.S. economic data due on Friday include housing starts and building permits for December, released at 8:30 a.m. Eastern, followed at 9:15 a.m. by December industrial production and capacity utilization.

The International Monetary Fund will publish its World Economic Outlook Update at 9 a.m.

Companies reporting earnings early on Friday include SLB $(SLB)$, Regions Financial $(RF)$, State Street $(STT)$ and Fastenal $(FAST)$.

China's economic growth hit the government's target of 5% in 2024, according to official data.

Shares of J.B. Hunt Transport Services $(JBHT)$ are dropping more than 10% after the trucking and logistics company reported lower revenue in the fourth quarter.

Nintendo shares (JP:7974) $(NTDOY)$ fell the most in three months after the company was coy about its plans for the Nintendo Switch 2 gaming device.

German institutions such as the Bundesbank, Army and Defense Ministry said they were suspending their accounts on Elon Musk's X platform.

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The chart

Jonathan Krinsky, technical guru at BTIG, notes that the latest American Association of Individual Investors sentiment survey shows the bulls minus bears spread fell to -49.2, the lowest reading since the fall of 2023. "That is supportive," he says. It means investor sentiment can readily improve from here. However, Krinsky adds: "Put/call ratios, on the other hand, remain relatively low suggesting investors are perhaps talking bearish, but not acting so."

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   GME     GameStop 
   INFY    Infosys 
   MSTR    MicroStrategy 
   TSM     Taiwan Semiconductor Manufacturing 
   AAPL    Apple 
   PLTR    Palantir 
   RGTI    Rigetti Computing 
   PLUG    Plug Power 

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-Jamie Chisholm

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January 17, 2025 06:30 ET (11:30 GMT)

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