The market as a guardrail

Will there be a ‘Trump put’ if stocks dive?

Following Trump’s election win, the markets rejoiced, partly fuelled by the unwinding of market hedges and the anticipation of more market-friendly policies from the new administration. Unfortunately, as with any “sugar high,” it just didn’t last. Since cooling in December, the S&P 500 has been stuck in a range around 6,000-6,100. This is an impressive feat, in our opinion, given the avalanche of policy announcements and talk. Sure, it has caused markets to bounce around much more, but they’re still within this range. Even the TSX, clearly more at risk of an escalating tariff conflict, has been within one good trading session of its all-time high. The word “resilient” is fitting.

Helping the markets absorb all this headline noise without throwing a tantrum has been the economy and earnings. Economic momentum was decent as 2024 finished off, and not just in America, as the data picked up in many jurisdictions. This improving economic backdrop seemed to more than offset concerns over U.S. inflation, which has been reaccelerating for the past four months. A little more inflation is not hard to stomach when the economy is trending to the upside. Perhaps it’s even justified. Meanwhile, fourth-quarter earnings were decent, with the S&P posting about 10% earnings growth and 5% sales growth.

Unfortunately, this support backdrop may be waning. Economic data have started to soften, notably for the U.S., which had been so impressive over the past couple of quarters. Just look at 10-year Treasury yields, which have fallen from a high of 4.8% in early January to 4.27%, even with inflation still ticking higher. Additional evidence of a softening U.S. economy is showing up in multiple areas, encapsulated in the CitiGroup Economic Surprise Index. This captures how the economic data are coming out relative to consensus economist expectations. That descending line, well, it means negative surprises.

Earnings, too, are looking a bit squishy. 2025 and 2026 earnings estimates for the S&P 500 dipped lower during earnings season. That is the period when most companies are giving some level of guidance or comfort about the coming quarters, so softening isn’t great. On a positive note, the market is pricing in 10% earnings growth for 2025 and 12% for 2026. So, perhaps some minor downward revisions are tolerable. As long as they stay minor.

If the supportive fundamental backdrop continues to falter, will the market remain so sanguine about the non-stop policy announcements and uncertainty? With policy risk (more every day, it seems), economic growth, momentum risk, and some earnings risk, this market is unlikely to stay in its three-month trading range much longer.

But if the market weakens, there could be some good news.

Enter the “Trump Put”

Many readers have likely heard of the “Fed Put,” or the more personalized versions depending on the Chair, such as the “Greenspan Put” or “Powell Put.” It is the widespread belief by market participants that if the economy or market falls too much, they (the Fed) will come to the rescue with more and more stimulus. The “put” part comes from the options market, as a put option can be structured to create portfolio insurance to limit the downside. Hence, “Fed Put.”

President Trump appears to measure his success, or the success of his policies, based on what the S&P or market is doing. In fact, during his first term, at times when markets reacted negatively in response to policy, the policy was often adjusted or even reversed. We experienced a micro episode of this on the morning of February 3, after the Mexico and Canadian tariffs were signed into law over the weekend. Including the Friday afternoon market slide, when it appeared the executive order was certainly going to be signed on the weekend and the market open on Monday, the S&P 500 dropped over 3% from 6,115 to 5,925 over a combined four hours of trading. And what happened next? Trump deferred the tariffs for a month, and the market bounced back to over 6,000, recovering fully a few sessions later.

The question then becomes how much market weakness is required to see a pivot from the flow of policy announcements from the administration. Or for those options-savvy folks, where is the put strike price? Clearly, it is an unknown, but the crux is that a drop in the market may well trigger a cooling of policy risk. Some policy reversals and no new market unfriendly policy announcements could well help the market recover from its weakness. Following the same line of logic, perhaps the rapid-fire onslaught of policy announcements was partially emboldened by a market that had proven resilient.

To be clear, we’re not saying policy announcements or Trump can save or control the market. Earnings, the economy, confidence, rates, yields, and policy all have an impact; it’s cumulative. But if there is enough market weakness, for whatever reason, policy reversals or softening would likely be welcomed by the market. Even a holiday from new policy announcements would be nice.

If you’re wondering what guardrails there are for the new U.S. administration, it may well be the market. One month done, 47 to go.

Craig Basinger is the Chief Market Strategist at Purpose Investments Inc. and portfolio manager of several Purpose funds, including Purpose Tactical Thematic Fund.

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