Following a decisive election victory for President Trump and rising odds of a Republican sweep of Congress, the anticipated path forward for government policy is becoming clearer. The unwind of uncertainty propelled U.S. equity markets to new heights last week, building on already impressive year-to-date gains. For the week, the S&P 500 delivered its best weekly performance of the year with a 4.7% gain, while the Dow Jones and Nasdaq Composite soared 4.6% and 5.8%, respectively. Small cap stocks posted even higher gains with the Russell 2000 surging 8.6% last week on enthusiasm around the prospects of tax cuts and deregulation from the incoming administration. The election headlines overshadowed other news last week, including a 0.25% rate cut from the Federal Reserve, bringing the federal funds rate down to 4.58%, which was in line with expectations.

The sharp stock market reaction corresponded with a plummet in the CBOE Market Volatility Index (the VIX), also known as the “fear gauge” of the stock market, which fell from over 22 at the start of the week to less than 15 at the end (which is below the average level of 18 over the past decade). This pattern of elevated volatility heading into the election followed by a rally upon the outcome becoming clear is consistent with past elections, but the reaction was particularly pronounced this time due to fears for a drawn-out and contentious process to determine the winner. So, the quicker than anticipated resolution and resulting clarity around the expected path for policy removed that significant overhang and markets climbed the wall of worry.

Despite the strong stock market gains, investor scrutiny is also increasing on the widening fiscal deficit and mounting government debt burden, which is expected to ramp further based upon the proposed tax cuts and government spending in President Trump’s platform. As a result, rising growth and inflation expectations are pushing long-term interest rates higher with the 10-year U.S. Treasury yield currently sitting at around 4.40% compared to the September low of 3.62%. Meanwhile, market expectations for rate cuts are being dialed back materially. Although the Fed delivered a 0.25% rate cut last week, expectations are split for one more rate cut in December, and the market is now only pricing in just 2 to 3 more rate cuts in 2025 that would bring the fed funds rate down to around 3.75% by year-end. This compares to expectations for the fed funds rate to end the year at closer to 2.75% in mid-September, so the market has priced out roughly 4 rate cuts in under 2 months.

A closer look at the stock market reaction last week gives insight to the expected winners and losers of anticipated policy changes. Among the top performing industries last week were banks and other financial services, autos, energy equipment & service providers, and a host of industrial companies including airlines, electrical equipment, transportation, and machinery. The common themes among these outperformers are that they are expected to see outsized benefits from President Trump’s platform that emphasized deregulation, tax cuts, less antitrust scrutiny on M&A, revitalizing domestic manufacturing, and furthering energy independence. The biggest laggards last week were rate sensitive industries like home builders, utilities, and real estate as well as large importers or companies with high exposure to China that would be negatively impacted by rising input costs from tariffs and heightening geopolitical tensions. Additionally, green energy stocks sold off on the potential for less support for solar and wind tax credits, and pharmaceutical stocks fared poorly under expectations for greater scrutiny on drug prices and uncertainty around the Affordable Care Act.

Despite the notable dispersion last week between perceived winners and losers under the new administration, historical data suggests caution in investing based on anticipated policy changes. Actual policy changes often deviate from expectations and other macro forces can overwhelm policy impact over the long-term. For example, the energy and financial sectors were anticipated to be among the largest policy beneficiaries during President Trump’s first term in office from 2016 to 2020, but both sectors significantly underperformed the broader market over that 4-year period due to the other macro factors like oversupply in the oil & gas industry and the onset of the pandemic in 2020.

In the week ahead, aside from the election headlines, investors will be monitoring corporate earnings as the third quarter earnings season winds to a close. With over 90% of index members’ reports in the book, the S&P 500 is tracking toward year-over-year earnings per share growth of 5.3%, which falls short of initial expectations of 7.4% at the start of the quarter. Sales growth has been solid at 5.4% year-over-year, but profit margins have come in a bit under expectations. On the economic front, the big headlines this week will be inflation with October CPI and PPI released on Wednesday and Thursday and an update on the pulse of the U.S. consumer with October retail sales announced on Friday.