(Bloomberg) — Investors bracing for President Donald Trump 2.0 know two things: The new administration will try to push through his “Make America Great Again” agenda, and the resulting bill could be sky-high.
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The Republican victor is poised to unleash a new round of policies — tariffs, tax cuts, immigration measures — to both boost economic growth and protect the nation from an influx of cheap, overseas goods and workers. While Trump’s first term saw similar policies and coincided with a corporate profit boom, these measures, now being implemented, threaten to reignite an inflationary spiral that took years to quell in the wake of the pandemic.
Markets greeted Trump’s victory with both optimism and fear. Stocks rose in early Wednesday trading, with futures on the S&P 500 (^GSPC) rising more than 2% on his pro-business agenda, including deregulation and activist industrial policies. No such cheer was evident in fixed income, as 10-year Treasury yields rose toward 4.5% on expectations that a widening budget deficit under Trump will force the government to default on its borrowings.
Higher yields could put pressure on the risk-taking rally by hurting rate-sensitive stocks and stifling new financing efforts by corporate issuers and consumers. Ten-year gains for equities are already 35% above the norm, and corporate bond risk premiums are at epic lows, certainly narrowing the margin for error for the economy.
“Stocks have the tailwind for now, but equities will keep a close eye on returns,” said Adam Crisafulli, founder of market intelligence firm Vital Knowledge, who previously spent more than a decade at JPMorgan Chase & Co. If the slump in US government finances continues, it will interrupt the Trump stock celebration.”
Then there is a growing risk of protectionism. According to JPMorgan, raising tariffs on Chinese imports to 60% alone would hurt the S&P 500’s (^GSPC) profits by as much as $15 per share, an amount that could wipe out nearly half of 2025 income gains. A capped version of the tariff plan, with an overall rate of 20%, could cut U.S. GDP by 0.8% and increase price pressures in coming years if only China retaliates, Bloomberg Economics predicts.
“A material increase in rates would represent the current administration’s most significant policy deviation and potentially the largest source of volatility,” JPMorgan strategists including Dubravko Lakos-Bujas wrote in a note before the election results. “Today’s macro environment is very different from eight years ago, when the business cycle was in mid-cycle, the labor market was less tight, inflation was not on the Fed’s radar and pro-growth 1.0 policies were easier to implement and had more impact. to the core.”
Yet simple stories have a tendency to blow up, especially under Trump. While his erratic relationship with the markets was a regular feature of his first term – particularly breaking norms on monetary policy and trade policy – risk assets have been exceptionally good, in no small part, thanks to Trump’s stimulative fiscal position .
This time, it is an open question how the executive branch will manage to drive its fiscal agenda and influence short-term soft landing bets, with the economy growing at healthy levels, inflation receding – for now – and the Federal Reserve in policy easing mode.
While Republicans have won control of the Senate, a handful of fiercely competitive races in the U.S. House of Representatives are still ongoing, raising the prospect that Trump’s Democratic rivals could force the Republican Party to soften its tax plans.
One thing is certain: During his first term, Trump trumpeted rising stock prices as a scorecard for the presidency, suggesting he had every incentive to keep the bull market going. At the same time, however, valuations were at their highest levels ever recorded on an Election Day, raising the bar for tax cuts to undermine stocks again.
Trump’s promise to cut the federal corporate tax rate from 21% to 15% would boost S&P 500 profits by about 4%, according to a September estimate from Goldman Sachs Group Inc. strategists. (GS). But that benefit is likely to be offset by higher borrowing costs due to rising fiscal deficits, said Seema Shah, chief strategist at Principal Asset Management.
“With stock valuations already so high and the economy set to slow modestly, a further rise in yields following a Trump victory could ultimately dent market sentiment,” she said.
Trump’s campaign plans would boost the government budget deficit by as much as $7.75 trillion over a decade, according to estimates from the Committee for a Responsible Federal Budget, a nonpartisan budget watchdog group. That is more than a fourfold increase in the current size of the deficit.
The new administration’s approach to the Fed is another wildcard with major implications for markets. Trump has repeatedly expressed doubts about the Fed’s policies and leadership. During an interview last month, he sidestepped questions about whether he would try to oust Jerome Powell, but said it was fair game for a president to tell the central bank chief how he thinks interest rates should change.
While the future of the market is unknowable, what is not in dispute is that as much as Trump wanted to take credit for the bull market during his first term, the America-first trade – going long US stocks and the dollar against international assets – gained momentum long before that. he was elected in 2016.
The era of American supremacy began immediately after the 2008 financial crisis, when the Fed went into bailout mode, supporting a sustained economic expansion. The boom has continued under Joe Biden’s presidency, with US tech megacaps leading the stay-at-home trade during pandemic lockdowns and the artificial intelligence craze of late.
According to Chris Grisanti, chief market strategist at MAI Capital Management, a Trump victory will lead to more budget deficits and inflation fears, but as long as corporate America holds up, he will continue to take risks.
“I will have higher interest rates, which are generally somewhat bad for the economy, if they are accompanied by higher corporate profits because the economy is stronger,” he said. “Markets reflect the belief that animal spirits will be released by the Trump presidency.”
—With help from Isabelle Lee.
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