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The Donald Trump-induced surge in equities and risky assets may well have run out of steam less than a month after his inauguration, according to analysts at Goldman Sachs.

Mr Trump’s promise to ramp up spending and cut taxes in the world’s largest economy has been a boon for stocks, lifting the Dow Jones Industrial Average to 20,000 for the first time in history and sending the S&P 500 up 10 per cent since his election in November on hopes for faster growth, rising inflation and swelling corporate profits.

But with the US’s economic recovery since the financial crisis already long-running, the scope for a major expansion in economic activity will be capped under the new White House administration, says Jan Hatzius at Goldman, who thinks the sentiment spike may well have peaked.

“We don’t think there really is that much ‘room to run’”, he notes. With the US economy operating at full capacity, higher spending is likely to mean higher inflation rather than a meaningful acceleration in growth, he says.

Mr Trump’s boost for the dollar also seems to be subsiding in recent weeks with the dollar index falling back from a 14-year high.

Although Mr Trump’s proposed spending splurge should “help promote a supply side revival in productivity and thus long-run growth, these outcomes are speculative at best and would take years to realise”, adds Mr Hatzius’ colleague, Charles Himmelberg.

“Moreover, other policy proposals, like greater immigration restrictions, could in fact reduce potential supply,” Mr Himmelberg added, pulling down on growth and inflation.

The much-vaunted switch among retail investors from government bonds into stocks on expectations of rising US inflation, also seems to have run its course and “almost fully reversed”, according to the investment bank.

Mr Himmelberg adds:

The 4-week moving average of flows into US equity funds has slowed to zero, and the corresponding flow into US bond funds has surged to a 6-month high.

Retail investors appear to be second-guessing their post-election growth optimism.

Copyright The Financial Times Limited 2017. All rights reserved.
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