It was tight, most polls were unable to split the candidates and the uncertainty in the swing states meant both candidates had routes to 1600 Pennsylvania Avenue. However it is now clear that, despite many commentators stating Donald Trump had a ceiling to his vote share, he picked up votes and that Vice-President Kamala Harris had not stepped up the share from President Joe Biden’s base in 2020.

A win in the popular vote seems a certainty now, alongside the Republican Party taking control in the Senate after picking up three seats. The remaining question is about the House of Representatives; president-elect Trump needs its approval for changes to tax and immigration. If this turns red, then for the next two years the Democrats will have limited political weight.

A combination of clarity and the Trump proposals pushed the markets higher. The S&P 500 Index opened just under 2 per cent up, at an all-time high, the Russell 2000 Index up 4 per cent. In the bond market, ten-year yields increased 20 basis points to nearly 4.5 per cent, although as expected the Fed made a 25-basis-point cut to rates yesterday.

Banks are seen to be major beneficiaries in the policy agenda with looser regulation expected, potentially driving more M&A activity. JPMorgan opened 9 per cent stronger, Goldman Sachs over 10 per cent, with the KBW Bank Index rallying over 8 per cent as the whole sector was dragged higher. Butterfield Bank was up 6 per cent in initial trading.

Technology, which has been the dominate sector through 2024, suffered a more mixed reaction. Of the “Magnificent Seven”, Tesla led the way, surging 12 per cent higher reflecting the close relationship that Elon Musk has had with the incoming president. Alphabet reacted slightly better than the overall market on the expectation that the Department of Justice investigation into it splitting up could be dropped; however, Apple lagged as it has a dependence on Asian importations for products that may suffer tariffs.

The green energy sector took the most significant hammering in early trading, expecting less favourable policies from the president-elect that it sees under the Democratic administration. Enphase Energy and First Solar both saw more than 14 per cent negative moves; even the larger Nextera Energy lost nearly $10 billion market capital. No policies have changed but the Energy Select Sector going up by more than 3 per cent gives a strong indication of what the market believes will be the divergence in upcoming policy.

It will take some time for the dust to settle on these initial reactions, but there are now important considerations for what the markets will do moving into 2025. It is rare to see mid-caps rallying strongly at the same time that ten-year interest rates also increase. Smaller companies traditionally have more debt and also sensitivity to rate moves; it is clear from the rhetoric that Trump is domestically focused, but this could be a mixed blessing for some domestic names. Investment at higher rates could stress smaller balance sheets and in a cyclical segment of the market, it may leverage the sector more to boom-or-bust operations. This may drive a more segmented market of winners and losers, so opportunities in the sector that has been undervalued could come with greater risk as interest costs erode their cash generation.

Economic policy is the critical segment that has the ability to shape the performance of the markets in 2025. Trump will look to set in stone the continuation of his tax policies, cementing tax cuts for citizens. The economic benefit of this will be more muted than before; this is just retaining the tax position rather than putting more cash into the economy. The more critical market factor will be the imposition of tariffs and the response that these generate. Consumers are known to pay the ultimate price, but there can be benefits from increased domestic production.

Washing machines had tariffs imposed in 2018 — not only did prices of imported machines increase but the domestic producers moved prices as well. Despite no tariffs imposed on tumble dryers, their prices inflated to match; consumers normally buy these items in pairs. Jobs in the United States were created as production was shifted domestically; however, the economic impact of these did not outweigh the inflated costs to consumers. If Trump does enact tariffs, then the US domestic economy will benefit in the medium term, but the initial impact will be likely inflation and the scale of that will depend on what corporates pass through.

Fed chairman Jerome Powell now has a conundrum: short-term market data still indicates the need to cut interest rates, but the previous expectation of over ten cuts through to 2026 has evaporated. With Trump’s intended policies adding to the national debt, stimulating domestic investment and likely creating inflation, the Fed will be minded to pare back the need for multiple rate cuts. The fallout has already been the ten-year interest rate increasing 50 basis points in the past month, and if debt continues to increase unchecked then investors will require greater return for the inherent increased risk.

The impact is that mortgage rates will remain higher and this does directly affect consumers, something that if inflation also bites could soften the benefit of Trump’s policies on economic growth. For investors, there are now higher interest rates for longer than expected in fixed income markets, but with the tax cuts promised there could be a tightening of spreads as large corporates have more attractive debt profiles than the US Government.

All these potential policy changes will create opportunities as markets tend to overreact to the rumour and then slowly establish the true economic impact. If there is looser regulation in financial sectors, not only would this benefit those names, but it would also generate M&A in segments that might not have been expected.

Underlying assumptions on earnings changes would be slower to transform but as the wood becomes clear from the trees, the medium-term impact will highlight potential undervalued names. There are more than two months before Trump is inaugurated to return to the White House, but the implications of his second term have already flushed responses out of the market that could set the stage for the next four years.

• James Balfour is Senior Portfolio Manager at LOM Financial (Bermuda) Ltd