Fed delivered ‘a much needed reality check to euphoric Trump trades’: Barclays

Investing.com — The Federal Reserve’s hawkish stance at the latest FOMC meeting has delivered “a much-needed reality check to euphoric Trump trades,” according to Barclays (LON:BARC) strategists.

“Euphoria in some parts of the US equity market was starting to flash red,” strategists led by Emmanuel Cau said in a Friday note.

They highlighted the Conference Board’s survey, which showed consumer expectations for rising stock prices at their highest since 1987. This optimism coincided with record highs in assets like Bitcoin and a pronounced outperformance of the US Tech & Growth sectors, overshadowing other market sectors.

Barclays notes the market breadth had been deteriorating, as indicated by a record number of daily decliners versus advancers.

But despite the retail enthusiasm and systematic buying, institutional investors had begun to exhibit caution, with some reducing their market exposure.

“Indeed, while we met a large majority of US bulls in our recent marketing, who didn’t want to go against the Trump trade, many had de-grossed portfolios and worried about retail exuberance,” strategists said.

“So the latest Fed-induced pull-back may not come as a big surprise to all, and could ultimately make it easier to deploy capital in the new year, with policy expectations now reset,” they added.

Barclays pointed to the Fed’s recent hawkish stance as a potential catalyst for a market pull-back. The central bank’s pivot this week has been a reminder to investors that reflationary policies could slow disinflation, implying fewer rate cuts ahead.

The US 10-year yields have risen to the 4.5% level, which is considered a threshold that may start to negatively affect equities, both in terms of breadth and direction.

“With the Fed removing its put and signaling higher for longer, we think this issue will be a key risk in 2025 and could slow/cap the market’s ascent from here,” strategists cautioned.

“The degree and speed at which Trumponomics materialize may indeed alter the growth, inflation and policy paths, and fuel more volatility.”

However, policy uncertainty is not limited to the Fed only. According to Barclays, the early revival of the debt ceiling debate, even before the new administration takes office, suggests that policy volatility and brinkmanship could become a consistent feature over the next four years.

This uncertainty and desynchronization are likely to reshape markets in 2025, strategists said, potentially benefiting Europe.

European equities have lagged significantly behind US markets since the election, creating a sharp performance gap. However, the Fed’s hawkish stance could limit further divergence next year.

Moreover, Europe’s underperformance has left its markets less crowded, with valuations and market dynamics appearing less stretched, compared to the extreme conditions seen in the US.