As US President Donald Trump’s administration continues to send shockwaves across the world scientists say financial markets are reacting not just to Donald Trump’s return to the White House but also to the unpredictability of this victory.

A team from the University of Surrey has undertaken a new study which concludes investors must diversify their portfolios to mitigate risks associated with political volatility and to remain vigilant about the potential for abrupt market corrections.

The study indicates that while there was an immediate surge in stock prices following Trump’s election, this was quickly tempered by investor concerns over potential trade wars and international instability.

A group of international researchers from the University of Surrey, Macquarie University, Australia, The Memorial University of Newfoundland, Canada and Paris School of Business, analysed the stock market response to Trump’s decisive 2024 electoral win using a robust event study methodology. This involved examining the performance of over 1,500 publicly traded companies on the Standard & Poors’ 1500 index, focusing on their stock price movements around the election date. The team observed significant abnormal returns, particularly among small-cap firms and specific sectors such as energy, which capitalised on anticipated regulatory changes.

Dr Shaker Ahmed, lead author of the study and Lecturer in Finance at the University of Surrey, said:

“Our findings highlight the complex landscape that investors navigate in the wake of major political events. While there is optimism surrounding pro-business policies, underlying fears of geopolitical conflicts can lead to volatility. Investors must prepare for a reality where gains can swiftly turn into losses.”

The research reveals a clear contrast between the “Hope Hypothesis” — the belief that Trump’s policies would foster a business-friendly environment — and the “Fear Hypothesis,” which warns of potential trade disruptions and uncertainty. The data shows that small-cap firms, primarily domestic, benefited most from this political shift, suggesting that investors are weighing their options carefully in this divided market.

Ahmed concluded: “Understanding the implications of political events on market dynamics is crucial for informed investment strategies.”

Derren Nathan, head of equity research, Hargreaves Lansdown said the concerns around the inability of the USA and China to agree a trade deal has impacted the market but investors remained resilient.

“Hopes of a trade deal between the US and China faded over the weekend with no sign of a last-minute Mexican-style pullback ahead of the implementation of Donald Trump’s blanket tariff of 10% on all Chinese made goods,” he said. “Beijing’s more selective 10-15% levies on energy commodities, agricultural machinery, high-performance cars and agricultural machinery have also come into force. There’s more to come from Washington, with a 25% charge being slapped on all steel and aluminium imports, with the rump of those currently being purchased from Canada, China and Mexico.

“Markets are largely taking unfolding events in their stride.”