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Anticipated Outcome: Donald Trump's Presidency Sparks Over $4 Trillion in Investment, Disregarding the Role of Artificial Intelligence (AI)
Jan 20 marks Inauguration Day for the one-of-a-kind President Donald Trump. As he takes the oath once more, it'll be the second time in our nation's history that a president serves two nonconsecutive terms. But beyond the political buzz, Wall Street is buzzing too!
During Trump's first term, the stock market skyrocketed. The venerable Dow Jones Industrial Average (DJIA), the mighty S&P 500, and the tech-heavy Nasdaq Composite respectively saw a 57%, 70%, and 142% surge in value. Talk about a bull market! It's worth noting that the stock market saw significant growth post-Trump's Election Day victory.
But as investors are well-versed in, it's all about looking forward.
As Trump takes the office, businesses will be ramping up their investments in key areas. While it may seem logical to expect massive AI spending during Trump's second term, there's another investment area likely to outshine AI spending.
Trump's AI Agenda
Don't underestimate Donald Trump's role in shaping technological trends, such as AI. PwC estimates that AI can contribute $15.7 trillion to the global economy by 2030, representing a staggering 26% increase in worldwide GDP.
Trump's impact on AI will primarily revolve around revoking outgoing President Biden's AI executive order (EO). This move will not only eliminate certain oversight committees but also allow the new administration to lay a completely new foundation for a rapidly developing but still in its early stages technology.
Trump's vision centers around promoting domestic AI innovation, especially when it comes to maintaining national security. He's been known for his 'America First' approach, and his focus on AI may reflect this philosophy.
What's more, with AI evolving beyond hardware and into real-world solutions that power virtual agents, self-driving vehicles, and safeguard sensitive data in the cloud, businesses have every reason to ramp up spending on AI innovation under President Trump.
But, investing in AI isn't the only story to look forward to in Trump's second term.
The Biggest Driver: Share Repurchases
Though AI might remain the media darling, share repurchases should be the real prize during Donald Trump's second stint as President.
In December 2017, Trump signed into law the Tax Cuts and Jobs Act, reducing the corporate income tax rate from a hefty 35% to a more manageable 21%. This spurred share buyback activity among S&P 500 companies, which averaged around $100 billion to $150 billion a quarter before the TCJA.
Following the TCJA, S&P 500 buyback activity surged to a new normal of $200 billion to $250 billion a quarter. This huge jump can be attributed, in part, to higher corporate profits brought on by reduced taxes.
Trump's plans for tax cuts are a win for share repurchases, potentially driving S&P 500 buyback activity beyond $4 trillion during his second term.
Wall Street's most influential businesses have primarily benefited from these share repurchases. Over the trailing-10-year period, S&P 500 companies collectively repurchased over $7 trillion worth of their own stock.
Some of the biggest winners have been tech giants like Apple, Alphabet, Microsoft, Meta Platforms, Wells Fargo, JPMorgan Chase, and Bank of America. For companies with steady or growing net income, reducing their outstanding share count over time can increase EPS and make them more appealing to value-focused investors.
Looking ahead, Donald Trump's second term should spur record-breaking share repurchase activity.
Enrichment Data:
Trump's second term is anticipated to have numerous short- and long-term impacts on corporate spending, focusing primarily on artificial intelligence (AI) and share repurchases. However, the specifics vary depending on policy decisions undertaken by the president:
Artificial Intelligence (AI)
- Increased Investment: Trump's joint venture, "Stargate," with OpenAI, Oracle, and SoftBank aims to invest up to $500 billion in AI infrastructure over the next four years. This infrastructure will primarily be based in Texas and potentially expand to other states, revitalizing the American AI sector[1][2][4].
- Regulatory Environment: Trump's administration has been less restrictive on AI development compared to his predecessors, dissolving some of the safety standards and regulations set by the previous administration. This accelerated development and deployment of AI technologies could contribute to new industry breakthroughs[4].
- Market Reaction: The announcement of the Stargate project has significantly boosted tech stocks, including Oracle's shares (7.2% rise), Softbank (9.3% jump in Tokyo trading), and Nvidia (2.3% climb)[2][5].
Share Repurchases
- Tax Policies: Trump's administration is expected to ease corporate tax regulations, generating more profits that could potentially lead to more share repurchases[5].
- Market Sentiment: The overall positive sentiment in the market, driven by optimism around Trump's policies and the strong performance of tech stocks, could further influence corporate spending decisions, potentially leading to increased share repurchases. The S&P 500 has reached an all-time high, with tech shares like Oracle and Nvidia surging due to AI optimism[5].
General Corporate Spending
- Uncertainty and Regulatory Changes: Trump's executive orders have introduced uncertainty surrounding federal spending. For instance, the temporary halt on disbursement of funds under the Infrastructure Investment and Jobs Act (IIJA) and Inflation Reduction Act (IRA) could affect various infrastructure projects, including AI-related ones, and create challenges for sustained and reliable federal investment in infrastructure[3].
- Energy Policy: Trump's focus on increasing fossil fuel production may have implications for companies involved in renewable energy and sustainable practices. This shift in energy policy could potentially influence corporate spending decisions in the tech sector, where sustainability concerns are on the rise[2][3].
In summary, Trump's second term is projected to significantly boost AI infrastructure investments through the Stargate project. The regulatory environment and energy policy changes could introduce uncertainties that might affect corporate spending in various sectors. However, the easing of corporate tax regulations, positive market sentiment, and high S&P 500 stock buyback activity could also encourage more share repurchases.
Despite Trump's expected focus on promoting domestic AI innovation and revoking outgoing President Biden's AI executive order, another investment area is likely to outshine AI spending during his second term. This area is anticipated to be share repurchases, with Trump's plans for tax cuts potentially driving S&P 500 buyback activity beyond $4 trillion during his tenure.
As Wall Street's most influential businesses have primarily benefited from share repurchases over the past decade, with tech giants like Apple, Alphabet, Microsoft, Meta Platforms, Wells Fargo, JPMorgan Chase, and Bank of America among the biggest winners, investors should closely watch this trend in Trump's second term.