The U.S. stock market’s response to Donald Trump’s 2024 election victory reveals a stark divide: while smaller American companies saw their shares surge, international corporate giants showed a much more muted response, according to new research published in Economics Letters.
The comprehensive study, which analyzed over 1,500 publicly traded companies, found that small-cap stocks jumped nearly 3% the day after the election, while the largest companies saw their shares barely move, dropping by 0.08%. This dramatic difference highlights how investors are betting on Trump’s “America First” policies benefiting domestic businesses while potentially hurting multinational corporations.
“Our findings highlight the complex landscape that investors navigate in the wake of major political events,” said Dr. Shaker Ahmed, lead author and Lecturer in Finance at the University of Surrey. “While there is optimism surrounding pro-business policies, underlying fears of geopolitical conflicts can lead to volatility. Investors must prepare for a reality where gains can swiftly turn into losses.”
The energy sector emerged as the biggest winner, with shares soaring 4.46% the day after the election, likely reflecting expectations of relaxed environmental regulations and increased domestic fossil fuel exploration. Manufacturing companies also saw significant gains, with their stocks rising 2.09% as investors anticipated benefits from potential “American product first” policies.
The market’s initial enthusiasm was tempered by profit-taking and reassessment on the second day after the election, when stocks fell nearly 1%, suggesting investors were weighing the longer-term implications of Trump’s victory.
This response differs notably from Trump’s 2016 victory, which caused more dramatic market swings due to its unexpected nature. The research shows that while both Trump victories delivered positive market shocks, the immediate returns in 2016 were substantially larger, reflecting the surprise factor of that win.
The study reveals an underlying tension between what researchers call the “Hope Hypothesis” – expectations of pro-business policies boosting corporate profits – and the “Fear Hypothesis” – concerns about potential trade wars and international instability that could hurt global commerce.
Smaller companies, which typically focus on domestic markets, appear better positioned to benefit from anticipated policy changes such as deregulation and tax cuts. These firms face fewer risks from potential trade conflicts compared to multinational corporations that rely heavily on international commerce.
“Understanding the implications of political events on market dynamics is crucial for informed investment strategies,” Dr. Ahmed added, emphasizing the importance of investors recognizing these nuanced market responses.
The research, conducted by an international team from the University of Surrey, Macquarie University, The Memorial University of Newfoundland, and Paris School of Business, provides a detailed look at how political events can create both opportunities and risks in financial markets, depending on company size and sector.
As markets continue to process the implications of Trump’s return to power, the study suggests investors should carefully consider their portfolio allocations, particularly given the stark differences in how various types of companies are responding to the new political landscape.
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