• Stocks have rallied since Trump won the election as traders expect his policies to drive growth.
• But the market is confusing positive conditions from Trump’s first term with current reality, a research firm said.
• BCA Research advises investors dial back risk, in the event growth during Trump’s presidency disappoints.

The market is wrong to expect another period of outsize growth under Donald Trump, and should dial back risk as a result, BCA Research says.

Stocks have rallied nearly across the board since Trump won the election earlier this month, with the S&P 500 up nearly 2% since Election Day and stock exposure hitting an 11-year high. Traders are betting Trump’s proposals for broad deregulation and corporate tax cuts will boost corporate earnings, particularly among so-called Trump trades like bank stocks.

But the research firm says those proposed policies might not prove as big of a boost to the market as they did when Trump first entered the White House.

“The market is expecting Trump to enact a flurry of policies that will unleash a year of growth like 2017. But we believe the consensus is wrong,” strategist Juan Correa said, pointing to a starkly different economic backdrop this time around versus at the start of his first term.

When Trump entered the White House in 2017, he was met with rising inflation and the start of a hiking cycle from the Federal Reserve. This time, inflation is coming down, as has rates. That makes the Fed’s focus pinned on the labor market, which has started showing signs of deterioration, Correa says.

Meanwhile, global growth appears to be on the downward slide. China’s stimulus hasn’t been enough to boost its property sector, and manufacturing employment remains tepid with the ISM manufacturing index under 50, while in 2017 it neared 60 and was already beginning to accelerate well before Trump’s win.

“Those betting on a 2017 scenario are doing so based on data from eight years ago,” Correa said.

Some investors may argue that Trump’s policies could reverse those macro trends, with pro-growth and inflationary policies like he implemented in his first term, and that those might be especially possible to enact with a Republican-controlled Congress.

But that is likely an overestimate, Correa says. In his mind, it isn’t clear that Trump’s tax cuts were actually at the heart of economic growth in 2017. He thinks that generating additional growth through government spending will be harder this time around. With such large deficits already, it’s unlikely there will be such a big increase from current levels, and projections for fiscal force next year are already negative, he said.

In short, traders are looking at Trump through the lens of his past term, rather than the odds stacked against him now.

“Investors are playing the man and not the macro. Even worse, they are playing not the man today but the man from eight years ago. As a result, several assets are overextended in our view,” Correa said, pointing to small caps, the dollar and risk assets.

Correa recommends positioning defensively instead, out of stocks and into bonds.

“We remain underweight equities and are defensively positioned. Bonds are offering outstanding value. Even in the event of a soft landing, 10-year Treasurys would return 12% from current levels over the next year,” he said.