Why is Wall Street betting on cyclical stocks to strengthen ahead of Trump's midterm elections?

As the US midterm elections approach, Wall Street is re-evaluating the recent economic statements from the Trump administration. From persistent calls for rate cuts to proposals to limit credit card interest rates, these policy signals are interpreted by the market as clear indications of pro-growth intentions. Investment banks generally believe that Trump will fully stimulate the economy and consumption before November, opening a window of opportunity for cyclical assets.

Which Policies Do Trump’s Stimulus Signals Point To?

The policy orientation of the Trump administration is becoming clearer. According to the latest news, the core goal is to maintain economic activity and affordability of living, reflected in three aspects:

Rate Cut Expectations

Trump continues to call for the Federal Reserve to cut interest rates, aligning with the current backdrop of declining inflation. Reports indicate that falling oil prices, easing housing costs, and the fading of one-time price increases caused by tariffs could allow inflation to fall more than expected. This provides the Fed with policy space to cut rates within the year and adds rationality to Trump’s calls for rate cuts.

Credit Card Interest Rate Cap

Trump proposed setting a cap of 10% on credit card interest rates, which will take effect on January 20, 2026. Although this move initially pressured bank stocks, UBS believes that even if implemented, it may be temporary and limited in scope, with manageable long-term impacts on the financial sector.

Fiscal Stimulus Expectations

According to reports, the “Big and Beautiful Act” signed by Trump allows 100% accelerated depreciation of corporate capital expenditures, encouraging companies to bring forward investments planned for the future to 2026. This policy will significantly boost capital spending and stimulate economic growth.

Why Do Investment Banks Favor Cyclical Stocks?

Under this policy framework, there is a consensus among investment banks: cyclical assets (industrials, materials, non-essential consumer goods) will be the main theme of this round of market rally, while defensive stocks will underperform.

Raymond James stated in its latest report that, given the strong expectations for monetary and fiscal policies and Trump’s frequent signals promoting growth, the market finds it difficult to bet against a successful economic cycle recovery. JPMorgan also favors cyclical stocks, expecting that slowing inflation will create room for further economic stimulation in 2026, driving economically sensitive sectors to outperform the broader market.

UBS pointed out that these policies are more election-oriented, with core voter concerns still focused on prices, housing, gasoline, and interest rates. This suggests that Trump’s policy tilt before the midterm elections will continue, benefiting cyclical stocks.

Policy and Corporate Earnings Resonance

According to reports, Goldman Sachs expects AI-driven productivity gains to boost S&P 500 EPS by 12% in 2026. This aligns with fiscal stimulus, providing dual support for cyclical stocks: first, policy-driven demand stimulation; second, corporate earnings improvement.

Market Risks in the Context of Political Games

However, the market also faces significant risks. Reports indicate that Trump’s continued attacks on the Federal Reserve’s independence have become one of the reasons for rising long-term interest rates. Fed Chair Powell is under criminal investigation by the Department of Justice, and this political game is impacting global long-term rates.

From a technical perspective, the S&P 500 is approaching the 7000-point psychological level. According to news reports, history shows that markets often experience volatility and adjustments before breaking through important integer levels. BTIG noted that in the past five attempts to breach the 1000-point mark, four resulted in staged pullbacks.

Summary

Wall Street’s bullish stance on cyclical stocks is based on a clear policy logic: Trump will ramp up stimulus before the midterm elections, with tools like rate cuts, credit card interest rate caps, and fiscal stimulus pointing in the same direction—maintaining economic activity. Coupled with AI productivity gains and corporate earnings improvements, cyclical stocks are indeed attractive.

However, in the short term, market sentiment may fluctuate due to policy uncertainties, debates over Fed independence, and technical adjustments at key levels. Investors need to monitor whether policies are truly implemented and whether inflation data (CPI release on January 13) supports further stimulus space.