Trump’s Debate Win Gave The S&P 500 A Boost. Then This Happened.

Wall Street may see former President Donald Trump’s presidential debate thrashing of President Biden as a bit too much of a good thing, if Friday’s start-and-stop S&P 500 rally is a guide.

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As Biden froze up, losing his train of thought just minutes into the debate, financial markets registered the clearest indication that investors view a Trump win as at least a modestly good thing. S&P 500 futures darted up 0.2% as Biden teetered and continued to edge higher overnight. Then came the tamest inflation report since late 2020, fueling hopes for a Federal Reserve rate cut in September. Both the S&P 500 and Nasdaq charged into record territory before investors started to have second thoughts. By Friday afternoon, markets had turned negative and finished at the day’s low point.

Biden came into Thursday’s debate facing an uphill fight and promptly wound up flat on his back from a largely self-delivered knockout punch. Now huge doubts are swirling about his capacity to remain the Democratic nominee. Trump is beginning to look like an overwhelming favorite to reclaim the White House, and odds are rising that he’ll have a Republican Congress to carry out his agenda.

Trump Effect Divides Industry Groups

Yet the consequences of one-party rule could be a mixed bag. Wall Street started the day upbeat that deeper corporate tax cuts are now much more likely than the tax hikes Biden aims to enact. But Treasury yields reversed higher on Friday morning as Wall Street started to envision bigger budget deficits. Some sectors shone, like financials and oil and gas stocks, on prospects of lighter regulation. Comerica (CMA) led super regional banks higher, climbing 6.7%.

But Trump’s dismissal of Biden’s Inflation Reduction Act as the “green new scam” probably helps explain why First Solar (FSLR) dived 9.8% on Friday. Trump’s long history of trying to replace the Affordable Care Act helped to sink managed-care stocks like Oscar Health (OSCR), which slid 10.4%. Hospital stocks, which have benefited from the Democrats’ push to expand Medicaid, also got bruised, with Tenet Healthcare (THC) off 3.8% and HCA Healthcare (HCA) down 6.4%.

Still, some health care stocks may fare better under Trump. Humana (HUM) shares rose 2.9% as RBC Capital wrote in a Friday note that Medicare Advantage carriers could get better treatment in a Trump administration.

Trump Rises, Biden Dives In Prediction Markets

Prediction markets that take bets on political outcomes moved instantly and dramatically once Biden struggled to find the right words. Biden’s odds of winning another term crashed from around 48% to 31% on PredictIt. His odds of claiming his party’s nomination dived to 67% from 85%.

Trump gained, but not as much as Biden lost. PredictIt now gives Trump 59% odds of winning a second term, up from 53% ahead of the debate.

Polymarket now shows 52% odds of a GOP sweep, up from 46% before Thursday’s debate.

Biden Replacement?

Political commentators essentially stuck a fork in Biden’s chances Thursday night, quickly arriving at a consensus that it will be hard for him to remain in the race. Ahead of the debate, political prognosticator Nate Silver already gave Trump 66% odds of an Electoral College victory. As Silver sees it, the key for Democrats is to win the battleground states of Pennsylvania, Michigan and Wisconsin.

That calculus could create movement to replace Biden with a Midwest governor, such as Michigan’s Gretchen Whitmer, though she’s little known and untested on the national stage. Betting markets see California Gov. Gavin Newsom as the most likely replacement for Biden, followed by Vice President Kamala Harris.

Because the first debate came unusually early, if Biden were to withdraw, there’s theoretically time for Democrats to rally around a new nominee at the party’s convention in Chicago from Aug. 19 to 22. However, choosing a replacement could be divisive. Dissension among progressives over how Hillary Rodham Clinton defeated Bernie Sanders for the 2016 nomination helped elect Trump the first time.

The biggest reason Biden stayed in the race until now is that there was no obvious choice to take his place.

More Trump Tax Cuts

The overnight rise in S&P 500 futures seems to signal at least a modest preference for a Trump presidency among market participants. If Trump wins and Republicans gain control of Congress, “an extension of the 2017 tax cuts would be likely, with a possible further reduction in corporate tax rates,” UBS Global Wealth Management strategists wrote in a June 24 analysis. Under a less-likely Democratic sweep, corporate tax rates would move higher.

While markets may cheer lower taxes and lighter regulation, UBS wrote, “This could be partially offset by concerns about the costs and inflation impacts of higher tariffs and trade wars.”

Key Fed Inflation Rate Cools, Lifting Rate-Cut Hopes

S&P 500

LPL Financial chief technical strategist Adam Turnquist noted in a May 31 analysis that rising odds of Trump’s election appeared to be correlated with gains for the S&P 500. Meanwhile, Biden’s falling odds since February were negatively correlated with the S&P 500 performance.

However, there’s another possible explanation for Turnquist’s observation. Strong job growth, which might help Democratic prospects, has only raised concern that the Federal Reserve will further delay interest-rate cuts. Weaker economic news of late has raised hopes for a September rate cut and helped the stock market. But the sense that households are cutting spending because they’re overstretched is hardly good news for Biden.

S&P 500 futures’ reaction to Trump’s debate win, therefore, provided the clearest sign yet that markets at least slightly prefer Trump at the moment. However, the reaction to the actual implementation of Trump’s policies will depend greatly on the state of the economy.

Possible Effect Of Piling On Stimulus

In a June 20 webcast, BCA Research chief geopolitical strategist Matt Gertken noted that further Trump tax cuts would provide a windfall that would help counteract a potential economic slowdown. But if the economy remains resilient, “then you’re just piling on stimulus on top of it, that’s where the bond markets will react very negatively.”

The S&P 500 rose 0.1% on Thursday to finish just 0.1% below its all-time high on June 18, before slipping 0.4% on Friday. The S&P 500 has climbed 62% since Biden’s election in November 2020. By comparison, the S&P 500 rose 57.5% in the four years after Trump’s election in November 2016.

Be sure to read IBD’s The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.

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