Trump victory implications and potential impact  to the AMI Large Cap Growth Portfolio

The stock market rallied sharply following the election of Donald Trump, primarily on renewed optimism over a lighter regulation approach.  However, there are still several puts and takes that we see emerging in the new year.  On the positive side, less regulation would be a big positive factor in our view and this prospect would be especially good for heavily regulated industries, as well as smaller firms that don’t have the capabilities to keep up with regulations.  On the negative side, tariffs will likely cause some prices to rise and could also result in retaliatory tariffs.  In addition, much-needed Government spending cuts and significant deportations could be headwinds to an already weakening economy.  In summary, we do not expect the new administration’s actions to be felt evenly by all areas of the economy.  While looking at Trump’s last administration should give investors clues as to focus areas, we believe that the economy and geopolitical environment are different enough today that there are still many unknowns.

Healthcare

We expect there to be some impact on healthcare, albeit in select areas.  Trump was critical of drug prices in his first term, especially the lower prices that other countries pay versus the U.S.  We would not be surprised to see some restrictions on the ratio of U.S. to international pricing that drug companies charge, meaning the U.S. may pay less for drugs but other countries would have to pay more.  The Inflation Reduction Act (IRA) included the currently in-process Medicare drug price negotiation scheme, where Medicare “negotiates” with the sellers of the top 10 Medicare drugs to effectively lower prices.  The first round of top 10 Part D drugs (patient administered) is complete, and the impact was fairly small given that these drugs are already discounted.  This system officially kicks off in 2026 and expands the number of drugs each year.  Should the IRA be repealed and this scheme cancelled, it would be good for drug companies, but we would expect some sort of replacement.

Tariffs would likely only have a modest impact in our view, mainly on medical device companies.  Some device companies import components from China, and/or have offshore manufacturing but any cost impact would likely be easily passed on to consumers, namely hospitals and insurers.

We do expect the Pharmacy Benefit Managers (PBMs) to come under increased scrutiny, although this is not necessarily a Trump-driven issue.  For background, PBMs are hired by insurance companies (most are captive to the large insurers) and employers to manage drug pricing.  They typically extract volume discounts from drug companies and pass along a portion of the savings to insurance plans.  PBMs have been blamed for incentivizing drug companies to charge high prices in order to appear to be extracting bigger discounts even though the net price paid is not affected.  An example of this, often reported in the news media, is the list price of anti-obesity medications (Ozempic for example) at $1,300 per month when an insurance company pays around $500.  The problem with this system is that a cash-pay patient pays the full $1,300, making the drug unaffordable for many.  It also fosters a system that is opaque with true drug pricing being unknown.  We expect Congress to address this in 2025 with any impact likely to be focused on the insurers who own PBMs.  

Robert F. Kennedy Jr (RFK) as Secretary of Health and Human Services could have some impact on healthcare names.  RFK has been a vocal critic of the childhood vaccine schedule and the level of clinical trials that go into the approvals.  Although we could potentially see a reduced list of recommended vaccines, we believe doctors will be slow to change and many would still recommend the full vaccine schedule.   

Most of AMI’s exposure is to drugs and medical devices, which we believe will see minimal impact from potential Trump administration policies.  Eli Lilly (LLY) has some exposure to the Medicare price negotiation already and we don’t believe this intensifies.  Tariffs could impact AMI’s medical device holdings, namely Becton Dickinson (BDX) and Insulet (PODD), but we expect this to be relatively minor and passed on the consumer/insurer.   

Technology

The new Trump administration’s approach to the technology sector is shaping up with several key themes.  One significant area of focus is the potential impact of tariffs on imports from China and other countries.  Many semiconductors and electronic components are manufactured in China, Taiwan, South Korea, and other parts of Asia.  The imposition of tariffs on these imports, or restrictions on U.S. exports to China amid a possible trade war, could disrupt the operations of certain companies.

However, given that Trump is being advised by tech-savvy figures like Elon Musk, there may be strategic exceptions.  For instance, imports of semiconductors manufactured in Taiwan—critical to powering the AI revolution—could be exempted.  This would mitigate risks in that segment and might even spur increased investment in semiconductor fabrication capacity within the U.S.

Another significant focus is the regulatory landscape.  In Trump’s first term, deregulation was a central theme, allowing businesses to operate with minimal government interference.  A similar approach is generally expected in his second term.  Large tech companies have faced aggressive scrutiny from the Department of Justice (DOJ) over antitrust concerns, and the current administration’s FTC chair, Lina Khan, has been aggressive in limiting mergers and acquisitions.  Trump’s appointment of Andrew Ferguson for FTC chair is expected to be more business friendly and reverse the anti-M&A agenda implemented by Ms. Khan.

Trump has recently signaled a shift in his stance, indicating that he is no longer focused on breaking up or banning companies.  For example, he recently said he had a “soft spot” for TikTok.  However, some within the GOP, including figures like J.D. Vance, have been vocal critics of Big Tech, highlighting ongoing tensions within the party on this issue. 

With Elon Musk potentially influencing Trump’s decisions, the administration might prioritize creating a regulatory environment that promotes unfettered innovation in technology.  Given Trump’s transactional nature, he is more likely to pursue negotiated settlements with companies rather than engaging in lengthy legal battles, emphasizing pragmatic over ideological approaches.

Lastly, the recently announced Department of Government Efficiency (DOGE) aims to reduce wasteful spending and potentially eliminate certain departments.  This could pose risks for tech firms that rely heavily on sales to the federal government, although the impact would likely vary depending on the company and the specific services offered.

We believe investment in cybersecurity and AI innovation will continue, however, reductions in the Federal workforce could jeopardize seat-based software sales, as fewer employees may result in lower demand for such licenses.  Additionally, there could be heightened scrutiny of pricing and project bidding processes, creating further challenges for companies competing for government contracts.

Among AMI’s technology holdings, there is potential exposure to hardware and semiconductor risks due to manufacturing dependencies in Asia.  Companies like Taiwan Semiconductor Manufacturing Company (TSM), Qualcomm (QCOM), and Broadcom (AVGO) rely heavily on parts produced in Taiwan and China.  As such, tariffs or a trade war could pose challenges; however, AI-related chips may be exempt due to their strategic importance to the U.S. economy.  Apple (AAPL) may also face some impact, given its significant product assembly in China.  That said, the company has been actively diversifying its supply chain to mitigate these risks.

In contrast, our software holdings, including ServiceNow (NOW) and Salesforce (CRM), are likely to experience minimal direct impact. In fact, these companies might find new opportunities by enabling the federal government to enhance efficiency through “digital labor,” replacing less efficient processes and personnel.

Financials

Financials are probably the most regulated area  of the economy and thus rallied substantially following the Trump win.  We do expect lighter regulation in almost all areas of banking, which should be good for this space.  However, we  do not expect the numerous layers of oversight to simply go away, thus it will likely be a slow process.  We also do not expect the biggest regulations, such as capital requirements, to be eased.  AMI portfolio holdings Mastercard (MA) and Charles Schwab (SCHW) should benefit from less regulation, but we don’t expect this to happen immediately but rather in baby steps over time and more around the margins.

Discretionary

The most meaningful impact to the Consumer Discretionary sector from the new administration is the potential for tariffs on imported goods.  While the precise amount and nature of tariffs is yet to be determined, it seems likely that the new tariffs will be more onerous than those enacted in the prior Trump administration, especially on goods coming from China.  The most impacted discretionary categories appear to be toys, home furnishings, sporting goods and electronics.  The positive is that many companies now have experience managing tariffs from the prior Trump administration, and most management teams seem confident that the impact will be modest.  Retailers will likely look to concessions from vendors to offset some of the impact and will be helped by favorable foreign exchange that will make costs lower where the goods are produced.  However, it will be challenging to avoid raising prices and given an increasing value seeking consumer, tariffs seem likely to further dampen demand for discretionary products. 

AMI’s exposure to retailers that could be impacted by tariffs is relatively limited.  Amazon (AMZN) and Costco (COST) both import products from China.  However, both companies have significant scale with vendors and should be able to extract meaningful concessions to offset any impact, while also having strong pricing power with the end consumer given their respective subscription-based models.  Should tariffs be enacted on products imported from Mexico, Constellation Brands (STZ), the brewer of Corona and Modelo, would be impacted.  However, we think it’s likely that Constellation would receive an exemption to the tariffs, given that the beer has always been brewed in Mexico and wasn’t moved there from the U.S., legally Constellation can’t move production out of Mexico, and many of the inputs are sourced from farmers in the U.S. 

Staples

Food companies will likely see an impact from the appointment of Robert F. Kennedy Jr. as the head of the Department of Health and Human Services.  RFK has been vocal on the negative health impact of certain additives in processed packaged food, in particular food coloring and preservatives.  He has been particularly focused on Red #3, which is derived from petroleum and is found in many well-known packaged foods.  While the scientific evidence of any adverse health impacts from these products is inconclusive, many of them are already banned in other countries, and the FDA banned the use of Red #3 in cosmetics in 1990. 

Reformulating these products will require some additional costs for food companies but shouldn’t be too much of an issue especially for multinationals who already operate where the additives are banned.  The aspect that is more uncertain is whether consumers will react to food that is different from what they’re used to – think Cheetos without the orange color or Fruit Loops that aren’t as brightly colored.  In addition, simply calling attention to the health risks posed by packaged foods will likely cause some consumers to steer clear, which will add another demand headwind for companies that are already struggling to grow volumes. 

Pepsi’s portfolio of carbonated soft drinks and salty snacks would be the most exposed  Staple in our portfolio to any changes that could be proposed by RFK.  That said, Pepsi (PEP) is a global company that should be able to adapt production without sizable additional costs.  Pepsi has also been building out it better-for-you portfolio of brands, and the company would likely accelerate the growth of this business, both organically and through M&A, in response to headwinds in the less healthy parts of the portfolio.

Industrials

Trump’s second term is expected to bring significant changes to the industrial landscape.  His administration aims to encourage reshoring of manufacturing and increase American exports to countries with which the U.S. currently has a large trade deficit, namely China, Mexico, Germany, Japan, Canada, and others.  The introduction of tariffs will be a key strategy to achieve these goals.

The industrial sector is one of the most labor-intensive parts of the economy, meaning any policy that reduces the availability of labor could impact productivity.  During Covid, for example, companies competed for workers from a smaller labor pool leading to real wage gains to which the Fed partially attributed the inflationary pressure seen in the previous couple of years.

Deregulation was a hallmark of Trump’s first term, and it is likely to continue in his second term.  One of the key areas is permitting reform, especially as it relates to the energy infrastructure needed to support the growing AI boom.  Without meaningful reform in his first year, the expansion of AI may be constrained by limitations in electricity generation, transmission, and distribution.  Additionally, the potential repeal of policies such as the Inflation Reduction Act could curtail renewable energy projects.  This could have an impact on AMI holding Quanta Services (PWR), which supplies outsourced labor to electric utilities, but we believe this will be offset by increased demand for electricity from AI projects.

Energy

Counterintuitively, energy stocks have historically underperformed during Republican administrations.  Although Republicans tend to create a more favorable regulatory environment for energy producers, this often leads to higher production, which drives down prices and negatively impacts stock performance.  However, this time, there are additional complexities influencing supply and demand.  Geopolitical tensions are escalating in key energy-producing regions, including the Middle East, Russia, and Venezuela, which could have far-reaching consequences for global energy markets.

Russia may regain access to European markets to sell its natural gas as part of a peace agreement, which could undermine U.S. LNG exporters.  During his first term, Trump expressed concern over Germany’s reliance on Russian gas, and it remains to be seen whether Russia will become a global player again.

While China is not a major energy producer, it is the world’s largest importer of energy commodities.  If U.S. tariffs effectively reduce Chinese exports, the resulting slowdown in China’s economy could lower global demand for energy.  This might, in turn, affect global energy prices unless the U.S. can offset the impact through an accelerating domestic economy.  AMI does not currently own any energy companies in the Large Cap Growth strategy.

To summarize, we believe there will be an impact to some companies from Trump’s policies but we feel these are limited and manageable in most cases for our portfolio holdings.  Many of these policies were enacted in Trump’s previous administration with little affect to the overall economy.  The focus on a curtailing Federal government spending will be a new wrinkle but we believe it is necessary for the good of the U.S. in the long run.

Disclosure

This communication is prepared and distributed by AMI Asset Management (AMI), an SEC registered investment adviser (registration does not imply a certain level of skill or training). The information contained herein, and the opinions expressed are those of AMI as of the date of writing, prepared solely for general informational and discussion purposes. The information contained in this communication has been compiled by AMI from sources believed to be reliable; however, AMI does not make any representation as to their accuracy, completeness or correctness and does not accept liability for any loss arising from the use hereof. Such information and opinions are subject to change without notice due to changes in market or economic conditions and may not necessarily come to pass. References to specific securities are not intended as recommendations of said securities. The reader should not assume that any investments in securities, sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. Past performance is not a guide to future performance and future returns are not guaranteed.