'High expectations can lead to disappointment': A top strategist at T. Rowe Price outlines the 3 risks he's watching as markets celebrate Trump's win

• US stocks were on a roll following Donald Trump's victory in last week's election.
• Markets are banking on lower taxes and fewer restrictions on businesses.

The week since the US elections was better for stocks than anyone other than Donald Trump's biggest supporters could have expected.

Many parts of the market caught fire ever since Republicans significantly outpaced polls on November 5. The consensus view among strategists is that US stocks are set up for success during Trump's next term, as they believe his policies will benefit corporations and the economy.

Sébastien Page, an investment chief and head of global multi-asset at T. Rowe Price, is mostly on board with this upbeat sentiment. He told Business Insider last week that the post-election relief rally checks out, as markets finally have more clarity about policy in the next four years.

"The reduction in the uncertainty that we had going into the election — that's good for stocks," Page said in an interview, as are the possibilities of deregulation and corporate tax cuts.

Even more vital for stocks is the economic growth backdrop. Widely followed indicators like GDP growth and the unemployment rate suggest that the US is already on solid ground, and consumer sentiment is rebounding strongly from perplexingly low levels.

While there have been signs of softness in the labor market, including lackluster job additions in four of the last five months, Page expects the economic expansion to roll on — at least for now.

"The probability of recession is rarely zero, but my view is, it's unlikely for the next 12 months," Page said.

3 key risks to watch heading into 2025

Although Page is optimistic about the path forward for stocks and the economy, he thinks investors shouldn't ignore three risks that could cause a market reversal.

Chief among Page's concerns is that valuations are historically high and leave little room for error on the earnings front.

The S&P 500's 35.6% rise in the last 12 months and 67% gain since its bear-market low in October 2022 has pushed the index's price-to-earnings (P/E) ratio to over 22x. That's the one of the richest marks in the last two decades, and it suggests this supportive backdrop is no secret.

And even if growth stays robust, stocks may have already pulled forward future gains.

"If you had to summarize my view, I'm positive on the economy, but I think it's mainly priced in," Page said.

If earnings continue to defy expectations, as they have again in the third quarter, stocks could keep climbing. Profits increased about 7.1% in Q3, which is much higher than the 4.6% that analysts were calling for. That's an underrated reason why stocks have done so well lately.

But otherwise, it's quite possible that the S&P 500 could give back much of its recent gains.

"There's a lot priced in," Page said. "The earnings expectations for next year are about 15% growth. We're tracking at around 9% growth this year."

Page added: "Earnings coming up is good, but high expectations can lead to disappointment."

Stocks often perform well in expansions, the investment chief said, though there are exceptions.

In 2022, the S&P 500 had its worst year since the financial crisis, even as earnings ticked up. Stocks were plagued by multi-decade high inflation, interest rate hikes, two quarters of negative GDP, and geopolitical flare-ups like Russia's invasion of Ukraine.

Most of those concerns have since been neutralized, though new ones could pop up whenever.

"There's always tail risks, and next year it could be geopolitics — maybe another oil shock," Page said. "But I don't personally see a repeat of '22, unless something major happens to maybe commodity markets, or a major disappointment in earnings — something unexpected in terms of some of those flagship companies that are dominating the market."

The last major concern Page cited is one that many market observers have warned about lately: a global trade war defined by steep tariffs, which could hurt growth and spark inflation.

"The market might be underestimating the potential impact of trade wars that could be disruptive," Page said. "Maybe the market is thinking, 'This is a problem for another day,' and we'll see. But the president has more power over trade policy than fiscal, and all those expectations [are] for lower taxes, so maybe the market's underestimating this a little bit."

Trump has hinted that he'll put 60% tariffs on Chinese imports and up to 20% tariffs on other foreign goods, though even some of his outspoken critics have said that he might be bluffing. That's Page's hunch as well.

"It's not necessarily what is actually going to happen," Page said. "With this administration, there's a tendency to use tariffs as part of a strategy to bring manufacturing into the country, as a negotiation tool."

If Trump actually implements such tariffs, pundits like Anthony Scaramucci have said there'd be a major market meltdown. Page had no such call, but even if there was a modest pullback, the investment chief wouldn't necessarily complain.

"We like to buy when markets sell off," Page said.