A top mind at JPMorgan Asset Management warns of clear economic red flag after Trump's big win, despite soaring US stocks

• Stocks had a day to remember after Donald Trump won back the White House.
• Market veteran David Kelly believes Wall Street is overlooking a key economic risk.
• The strategist explained why he's worried about tariffs, even as his peers shrug them off.

Markets are celebrating Donald Trump's election as president, though the leading strategist at JPMorgan's multi-trillion asset management arm is not in the mood to party.

US stocks had one of their best days in years and hit new records after Trump's resounding win over Kamala Harris in Tuesday's election. The S&P 500, the growth-heavy Nasdaq Composite, and the small-cap heavy Russell 2000 rocketed between 2.5% and 5.8% higher on Wednesday.

That broad-based equity rally didn't include bonds, which got shelled on Wednesday. Yields, which move inversely to bond prices, vaulted higher for US Treasuries across durations.

Both of those moves make sense, said David Kelly, the global strategy chief at JPMorgan Asset Management, in an interview on Wednesday.

"If you have a Republican sweep, then Donald Trump can push through whatever tax bill he wants to in 2025, pretty much," Kelly said. "There is potential for significant tax cuts, and we know that has such a direct impact on corporate earnings — after-tax corporate earnings — that that is, logically, very positive for the stock market."

But while Wall Street might cheer those tax breaks, Kelly warned that they could lead to higher inflation, one of Democrats' liabilities in this election cycle.

Corporate tax cuts could have consequences, in Kelly's view, as he said they'd cause inflation to rise alongside the US national debt burden. That would be a major headwind for bonds, and stocks might also get dragged down.

Tariffs could be a terrible outcome for stocks

If one of Kelly's highest convictions hunches is correct, this market rally is in trouble anyway.

The strategy chief has been adamant that higher tariffs — one of Trump's key proposals — would cripple the US economy and endanger the global economic expansion.

"Tariffs are not a good idea," Kelly said at a late-October press event hosted by JPMAM. "It's kind of like a nuclear threat — the whole point is, if you actually end up using it, you kind of screwed up somewhere."

Most economists condemn tariffs, which are taxes on imports, because they tend to lead to higher prices and lower economic growth. Kelly has said he'd have to increase his inflation target and slash his long-term growth outlook if Trump followed through on his tariff proposals, given that they'd almost certainly prompt counter-tariffs that would hurt US exporters as well.

"Retaliatory tariffs hurt growth in both countries and push up inflation in both countries," Kelly recently said. "They're actually sort of the magic stagflation elixir. There are very few things that will actually give you a stagflationary impulse, which both slows growth and increases inflation."

A global trade war is a frightening possibility that now seems increasingly realistic. Paraphrasing Mahatma Gandhi, Kelly said that "a tariff for a tariff will make the whole world poor."

On the campaign trail, Trump teased aggressive tariffs: a 60% tax on Chinese goods and as much as a 20% upcharge on all other imports. When asked whether there was any chance that those proposals could be effective, the strategy chief had a simple answer that he didn't hedge.

"No," Kelly said. "I'm not trying to be political at all. I thought this was consensus, actually. I thought the biggest people in favor of free trade was the Republican party."

Kelly later added: "I challenge anybody to show me a long-term study which shows that tariffs actually do promote stronger economic growth or stronger job growth domestically because I've never seen it."

Why tariffs should be taken with a grain of salt

Although Kelly is far from alone in his antipathy to tariffs, it's worth noting that most of his counterparts are much less concerned about that part of Trump's economic agenda.

One exception is Tom Orlik of Bloomberg Economics, who's firmly in Kelly's camp. The economist said at a conference his firm hosted in early October that Trump's tariffs would cause "seismic shocks to the US economy" by throttling growth and sparking inflation.

But Chris Murphy, Susquehanna's cohead of derivatives strategy and a copanelist with Orlik, reasoned that Trump could always back away from tariffs if the market reacted poorly to his proposals. Besides, Wall Street is far from frightened right now.

Sean Gallagher, the global head of Lazard's small-cap equity platform, made a similar point in a recent interview with Business Insider when asked about Trump's tariffs and Kelly's stance.

"Often with Trump, the rhetoric and reality are not the same," Gallagher said. He added: "I don't know if all this rhetoric is going to match what's going to actually happen."

The small-cap maven described himself as a free-market aficionado who's generally opposed to tariffs, including the ones that Trump outlined during his campaign. He said he'd prefer to avoid them, and he ventured that most Americans probably feel the same way.

Ultimately, Gallagher thinks there will be some tariffs, though they may be more tempered than what Trump has floated. Inflation is a key reason Trump won, and he shouldn't forget that.

"We have to think about all the knock-on effects of tariffs, and his economic team will have to think about that as well," Gallagher said. "Trump's going to have to be, rightly, concerned about inflation. He's been talking about it too, how inflation's been a problem."

Gallagher concluded: "We don't want to reignite inflation. I don't think anybody's for that."