Trump's second term is characterized by "inconsistency." US stock investors urgently need a new action guide.

Summary Last week, US President Donald Trump's volatile attitude towards his signature tariffs caused market turmoil. Investors attempting to adjust their stock portfolios to cope with this ongoing uncertainty discovered that following the former president's playbook from his first term was not very helpful. Trump's strategy remains unchanged, promising to impose aggressive tariffs on trade partners and then quickly retracting, postponing, or completely canceling the imposition. Besides this, basically everything else is changing. Firstly, the range of goods affected by the tariffs he proposed will be broader than in his first term. But more importantly, investors are in a completely different paradigm of higher volatility. The S&P 500 index is on a hot upward trend, rising 53% accumulatively in 2023 and 2024, pushing valuations to bull market highs. In comparison, the S&P 500 index only rose by 8.7% in the previous two years before 2017, giving Trump more room for stock price increases after taking office. For Tim Hayes, Chief Global Investment Strategist at Ned Davis Research, this means taking a defensive approach when allocating risk assets. He stated, "If tariffs trigger a trade war, cause bond yields to rise, deteriorate the macro environment, and lead to large-scale outflows from the tech industry and the US market," the company's investment model may consider reducing stock allocations. This cautious approach highlights a changing macro environment. Inflation is intensifying, interest rates are much higher. Compared to eight years ago, the federal deficit is a more concerning issue. Overall, while the economy is still thriving, the background of the US stock market is much more worrying. Todd Sohn, ETF and Technical Strategist at Strategas Securities LLC, stated, "We are in a high expectations environment as the bull market enters its third year, just coming out of the bear market in 2017. Any form of vulnerability could disrupt the market." Furthermore, investors' exposure to stock futures is currently over 40%, compiled by Mislav Matejka, Global Head of Equity Strategy at J.P. Morgan. This ratio was below 10% in 2017. This means that compared to Trump's first term, investors have much less "dry powder" to buy stocks in the coming months. In terms of expectations, investors have never been so bullish on the stock market at the beginning of a president's term. Charlie Bilello, Chief Market Strategist at Creative Planning, mentioned that by the end of January, the CAPE was close to 38 after adjusting for the economic cycle, marking an "extremely high" level. The position situation is also similar. The US equity risk premium (ERP) as a measure of the difference between stock and bond expected returns is currently deep in negative territory, unprecedented since the early 21st century. Whether this is a negative indicator for stock prices depends on the economic cycle. Lower figures can be seen as indicating rising corporate profits, but may also suggest stock prices have risen too fast, far exceeding actual value. However, the fourth-quarter earnings season has shown a worrying trend so far. Fewer US companies are exceeding earnings expectations, tariff negotiations dominate earnings conference calls, and the outlook for 2025 has already been impacted. Investors are concerned about the impact of tariffs on the automotive industry's earnings this year, with Ford Motor Company (F.US) and General Motors Company (GM.US) experiencing sharp declines in stock prices after their earnings reports. Industrial giant Caterpillar Inc. (CAT.US) is seen as a bellwether for trade tensions, warning that under demand pressure, revenues will decline, and the rising prices of high-priced equipment it sells will only make the situation worse. Meanwhile, some investors are looking at niche markets within the stock market, where valuation bubbles are smaller, and historical patterns are more favorable. Scott Welch, Chief Investment Officer at Certuity, is reallocating funds to an area that typically performs well during Fed rate cuts but has been overlooked by the market: mid-cap stocks. Welch said in an interview, "The pricing of large-cap tech giants is perfect, so it won't cause much damage." "They have already risen because of their strong earnings and cash flow, but nothing is eternal." Ultimately, in this scenario, investors face the biggest challenge of reading the political winds and figuring out where the Trump administration will go on tariffs and trade policy. The lack of clarity has led many Wall Street professionals to closely watch everything but not take action yet. Mark Newton, Head of Technical Strategy at Fundstrat, said, "We always tell investors not to focus on politics because politics are unpredictable. The most important thing is to remain flexible and adjust portfolios quickly based on market trends.""Stock market has little direct impact." "Every year there are frightening things that investors need to worry about, but overall, the stock market has been relatively resilient.""Bonjour, comment vas-tu aujourd'hui?" "Hello, how are you today?"