Have U.S. stocks reached their bottom? What could make Trump change his policies?

Deutsche Bank's latest research shows that the U.S. stock sell-off is not over, and the S&P 500 index may further decline to 5250 points.

Deutsche Bank analyst Binky Chadha pointed out in a report on Friday that uncertainty in trade policy, a sharp decline in consumer and business confidence, and weakening economic fundamentals are posing severe challenges to U.S. stock investors. As the current market has not fully priced in the potential risks of a broader economic slowdown, the S&P 500 could potentially drop to a low of 5250 points, a further decline of 7% from Friday's closing price of 5638.

Nevertheless, Deutsche Bank maintains its year-end target for the S&P 500 index at 7000 points, provided that the government alleviates trade policy uncertainty, allowing the business cycle to continue. Deutsche Bank believes that if Trump's net support rate (support rate - opposition rate) falls below -5%, he will change his current policies.

Deutsche Bank notes that the current market situation is filled with challenges and uncertainties. Developments in trade policy, performance of economic indicators, and government policy responses will be key determining factors for the future direction of the market. As the critical date of April 2 approaches, market volatility may further increase. Investors should remain vigilant, pay attention to signals of policy changes, and prepare for potential further market adjustments.

Sell-off to Continue, S&P May Drop to 5250 Points

Since the peak in February, the S&P 500 index has accumulated a decline of 10%, which still falls within the range of common market adjustments post the global financial crisis and has not evolved into a bear market. Stock positions have been significantly reduced from an overweight level (92nd percentile) near historical highs, but currently only slightly down to an underweight level (26th percentile). With trade policy uncertainty expected to last at least until April 2, investors are likely to continue to reduce their positions.

Deutsche Bank analysts believe that if investor positions drop to historical lows (the levels seen during the last trade war), the S&P 500 index could fall to 5250 points. Notably, although cyclical sectors such as materials, industrials, and financials have outperformed the market since the February peak, the market has not fully priced in the potential risks of a broader economic slowdown.

Fundamentals Starting to Weaken, Time is Tight

Although hard data has not yet weakened, survey data has begun to deteriorate. Both consumer and business confidence have seen significant declines. CEO confidence, a key indicator of corporate spending, hiring, capital expenditures, and business cycle outlook, has fallen to levels not seen since the European financial crisis in 2012.

Capital expenditure plans have been significantly cut, completely offsetting the rebound seen after the election. The emerging recovery in manufacturing may stall. Although first-quarter GDP growth forecasts have not yet been downgraded, a downgrade is expected soon. First-quarter earnings expectations have been slightly lowered, but Deutsche Bank believes these downgrades have not fully reflected the macro growth slowdown, and thus expects the downward trend to continue.

Will Trump Change His Position?

While the market sell-off and potential economic weakness are clearly important, the key consideration is political factors. Deutsche Bank believes that a significant decline in presidential approval ratings is a necessary condition for the government to reconsider trade policies. Consumer confidence has begun to decline over the past two months. Although consumer confidence is not a good predictor of consumer spending, it is indeed an important driver of presidential approval ratings. Compared to the level of consumer confidence, the current president's approval rating remains relatively high, but this indicates there is still significant room for decline.

The net approval rating (approval rating minus disapproval rating) has dropped from 12 percentage points on inauguration day to slightly negative values. Deutsche Bank expects that the net approval rating must turn into a more significant negative value (at least -5%) to prompt the government to start considering policy adjustments.

Year-end target of 7000 points has not been abandoned

The rapid decline in consumer and business confidence, the stock market, and Trump's approval rating has been very swift. In the short term, Deutsche Bank expects these trends to continue, putting additional pressure on the stock market, with April 2 marked as a key date for tariff plans.

If the decline in various economic, market, and political indicators prompts the government to propose a credible plan to address tariff uncertainties, as anticipated in Deutsche Bank's baseline scenario, the business cycle will be extended. In this case, the stock market may rebound strongly, returning to the long-term upward trend channel, similar to the performance after the first phase of the trade agreement in 2019.

Despite the increased risks, Deutsche Bank currently maintains its year-end target of 7000 points for the S&P 500 index.

Risk warning and disclaimer

The market has risks, and investments should be made cautiously. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at one's own risk