It might seem a tad too early to make predictions for the upcoming calendar flip, but with a new U.S. presidential administration set to take office—and already telegraphing its policy intentions—we’re beginning to see which industries are likely to benefit the most from those policy changes.
Let’s begin by looking at the overall market environment before we zero in on the segments and investments that should benefit from federal policy shifts in 2025.
In my latest webinar presentation for the Cabot Turnaround Letter, I noted that this year was one of the most liquid market environments I’ve seen in several years. Even during this summer’s selling pressure in the tech sector, liquidity as measured by various credit spreads, and even the NYSE advance-decline line, refused to break down under the weight of the pressure but instead continued trending higher in reflection of the supportive backdrop.
Another factor to consider is the crypto market, which has been in rally mode ever since the November election results came in. More than perhaps any other asset group, strength in cryptocurrencies like Bitcoin reflects a willingness among investors to embrace risk. For that reason, Bitcoin price rallies have nearly always led, or accompanied, equity market strength with the past couple of weeks being no exception.
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And since President-elect Trump has made clear he is a friend of crypto (he recently said he wants the U.S. to become the “Bitcoin superpower of the world,” and he also nominated pro-Bitcoin Matt Gaetz as his U.S. attorney general), I expect that crypto will be one of next year’s outperforming markets.
Another market that I expect will show outsized strength next year are small-cap stocks in the aggregate. In my daily search for turnaround-worthy trading and investing ideas, I’ve lately found myself drawn to the Russell 2000 small-cap stocks, which are yielding some of the most attractive turnaround candidates I’ve seen in months.
For what has seemed like an eternity, the small-caps were stuck in limbo and have underperformed their large-cap cousins, but that dynamic is now changing.
As the asset manager Roger Montgomery recently observed, the small-cap stocks of innovative businesses with pricing power should perform well under the pro-business Trump administration.
He sees a likely repeat of Trump’s first presidency in 2025, including tax cuts and a deregulatory environment, both of which theoretically bode well for small-cap companies.
“The last Trump administration emphasized policies that stimulated domestic economic growth,” said Montgomery, “such as infrastructure spending and tax reforms, benefiting these companies.”
What’s more, as small-cap companies typically derive a big portion of their revenue from domestic operations, a stronger U.S. dollar—which many analysts anticipate under the new administration—should also boost the small caps.
And with the Russell 2000 Index just recently nudging up to its late 2021 high, the small-caps are far from being overcrowded and have only just begun to attract attention from retail investors.
Cabot’s resident small-cap expert, Tyler Laundon, certainly has many more insights into this realm than I do, but we both see the small-cap arena as being one of the best opportunities in town for investors heading into 2025.
Another area of the market that should benefit under the new president is the energy sector, as Trump as promised to “unleash energy” across a number of energy-related industries. One of those industries is the much-maligned coal space, which could see a comeback of sorts in the next couple of years.
Prior to this month’s election, growth in coal demand was expected to flatten out in 2024 and 2025 as the U.S. and other countries shift to cleaner forms of energy production. But those expectations are now in question in the election’s wake.
According to industry analysts, Donald Trump’s victory could extend the life of domestic coal-producing plans for years if he implements plans to overrule the Biden administration’s environmental rules for coal, which bodes well for producers of both thermal and metallurgical coal.
Indeed, already we’re seeing increasing signs of life in the largely overlooked coal stock space. The evidence includes recent earnings-related rallies in coal producers CONSOL Energy (CEIX) and Hallador Energy (HNRG). And among smaller players in the coal mining space, I’m increasingly seeing a number of potential turnaround setups taking shape as informed investors are evidently pivoting toward coal stocks as a value play in what looks to be a looser regulatory environment for energy next year.
All told, while there should be plenty of opportunities for investors to profit from next year’s changing regulatory environment, the areas of small-cap stocks in the aggregate—and energy stocks and crypto in particular—are the ones I believe will benefit the most.
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