Key takeaways
Capital markets generally reacted enthusiastically in the early days following Donald Trump’s 2024 presidential election victory.
Investors are now watching for more specifics about Trump’s key economic proposals to determine the potential investment ramifications.
Proposals related to immigration, tariffs and taxes are likely to have a notable economic impact.
As investors assess prospects for Donald Trump’s second presidential term, which begins on January 20, 2025, they’re increasingly focused on policy changes and the resulting economic and market implications. In the weeks following Trump’s early November election victory, the stock market continued a bull run that began in October 2022, with investors anticipating policies that generally promote economic growth. At the same time, interest rates remain elevated and investors are keeping a close eye on Federal Reserve (Fed) interest rate policy in light of potential policy changes that may alter the economic landscape.
“The markets faced a series of concerns in 2024’s closing months,” says Tom Hainlin, senior investment strategist for U.S. Bank Asset Management. “Investors worried about what would happen if inflation reaccelerated, what if the Fed had to raise interest rates, what if the election outcome is uncertain. We overcame all those hurdles.” Along with a clear Trump victory and a Republican sweep of the House and Senate, Hainlin notes that consumer spending remains solid and corporate earnings are positive, all factors contributing to stock market gains.
As the new administration plans its agenda, how should investors prepare?
The specifics of many potential Trump administration economic policies are not yet clear. While some policies can be implemented using only executive powers, others will require Congressional approval. Trump has the benefit of his own Republican party controlling both the House and Senate, but the advantages are narrow. When the new Congress is seated on January 3, Republican’s Senate advantage will be 53-47. In the House, the split is even closer, with 220 Republicans to 215 Democrats. The gap will initially narrow, as three House Republicans plan to vacate their seats, requiring either appointments or special elections to fill them.
During the campaign and since the election, Trump has consistently focused on three key policy areas with potential economic and market ramifications.
President-elect Trump has emphasized reducing the number of undocumented immigrants currently residing in the U.S. This includes plans to deport millions of immigrants. “The idea of mass deportation requires a lot of people and financial resources to meet his stated goals of moving millions of people out of the country,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “An economic consideration is that many of these immigrants, regardless of legal status, are part of the labor market.”
Haworth says losing this portion of the workforce could have inflationary implications, though the impact might be delayed by a year or more. Foreign-born workers make up nearly 20% of the U.S. labor force.1
While action on immigration, much of which can be enacted by Presidential executive order without Congressional approval, is expected in the administration’s early weeks, specifics on the full scope of policy actions have yet to be released.
The transition continues from the 1990s and early 2000s environment promoting free global trade to a more restrictive trade policy. In his first term, President Trump applied tariffs, particularly aimed at China. President Joe Biden kept many of those tariffs in place. Candidate Trump, in 2024, emphasized his desire to boost tariffs, and since his election, promoted a new 10% tariff on Chinese goods, and 25% tariffs on goods imported from Mexico and Canada.2
“Previous tariff increases weren’t as dramatic and had little inflationary impact,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “But adding tariffs at the scale being discussed would have inflation implications.”
Hainlin notes that Trump’s statements may be a negotiating tactic to initiate reforms among trading partners. “If you are looking for a market that has attractive growth, the U.S. is an ideal market to access. That puts the U.S. in a stronger bargaining position during trade talks.”
In his first term, President Trump’s primary domestic achievement was the 2017 passage of the Tax Cut and Jobs Act (TCJA). It implemented significant income and estate tax cuts along with other tax law changes. However, the TCJA sunsets at the end of 2025. During the campaign, Trump emphasized his desire to extend the tax cut package. “This is more of a 2026 issue since the current tax rates extend through 2025,” says Haworth. “Therefore, it may be later in 2025 before Congressional action occurs.” Narrow Republican majorities in the House and Senate may also complicate the legislative process.
Candidate Trump, during the campaign, proposed several additional tax cuts, including the elimination of taxes on tip income and Social Security benefits, and a cut in the corporate tax rate. It’s unclear whether these proposals can gain necessary Congressional support.
One key issue is the federal budgetary impact. According to a non-partisan organization’s recent estimate, extending the individual income and estate tax provisions from the 2017 Act would add nearly $4 trillion plus interest costs to deficits through fiscal year 2035.3 Congress may look for places to cut spending to offset some of the TCJA extension’s costs. “Offsets will require negotiation,” says Hainlin. “Nevertheless, directionally, it appears personal and corporate income tax rates are likely headed lower, not higher.”
A major consideration is how Trump administration policies may impact inflation. Tariffs, in particular, are a concern. “The magnitude of tariffs as proposed will be immediately inflationary for certain sets of goods,” says Haworth. “Previous tariff increases weren’t as dramatic and had little inflationary impact, but adding tariffs at the scale being discussed would have inflation implications.”
An immigration crackdown could have a mixed impact. If it meaningfully reduces the workforce, it could push labor costs higher. At the same time, it could have a favorable impact on the housing market. “Lower immigration could relieve some price pressures on rents,” says Hainlin. However, Hainlin also points out that the interest rate environment also has a significant impact on the availability of single-family homes. “Housing availability is so low because of the notable gap between today’s mortgage rates and what many homeowners pay on their existing mortgages.” This has deterred many existing homeowners from considering selling their house and purchasing another with a new, more expensive mortgage with a higher interest rate.
Fed interest rate policy is typically based on key economic trends. The impact of lower tax rates (considered a stimulative economic policy) and tariff-driven cost increases may prove inflationary. This could deter current plans by the Fed for further interest rate cuts. The Fed is less likely to lower rates if inflation appears to be on the rise again.
Since the November 5 election (through December 6), the S&P 500 gained 5.3%, an indication, in part, of investor enthusiasm for Trump’s victory. However, those gains were based more on anticipation of potential policy changes rather than specific actions.
Some market enthusiasm for Trump’s victory may reflect the fact that markets generally prospered from 2017 to 2021, during Trump’s first term.
While several significant policy proposals are on the table, the implementation timeline is less clear. “Trying to determine the order of government operations will determine 2025 outcomes,” says Haworth. “Quite often, the order of operations is a lot slower than markets want.”
Hainlin agrees that the true impact will take time to decipher. “Companies indicated earlier they were hesitant to make major investments pending election results,” says Hainlin. “Now they are waiting for more clear direction based on cabinet appointee confirmations, Congressional committee leadership roles and actual policy votes.” One immediate concern facing the outgoing Congress and administration is dealing with a federal budget deadline. The fiscal 2025 budget has yet to be approved, but a temporary funding measure expires December 20, 2024, so Congress must act by that time to keep the government operating.
“At this point, markets have a difficult time pricing to policy, so the focus is still on solid earnings, steady consumer spending and the economy still achieving a soft landing,” says Haworth. Similarly, investors should continue to focus on maintaining a properly diversified portfolio that is attuned to their goals, time horizon and risk appetite.
If you have questions, talk with a wealth planning professional. The U.S. Bank Wealth Management team is always here to help.
Between the end of trading on election day, November 5, 2024, through December 6, 2024, the S&P 500 gained 5.3%. While some of that may be attributable to investor reaction to election results, other factors have also come into play. The Federal Reserve was in the process of reducing short-term interest rates, generally considered a favorable sign for stocks. In addition, the U.S. economy continued to show persistent strength with the labor market holding up well, helping consumers maintain elevated spending levels. This contributed to continued corporate profit growth, a key stock market driver.
Investors tend to assess a variety of factors. Federal government policy, often driven in large part by the President, is only one of those factors. Another major story boosting markets is that the U.S. economy grew at approximately a 3% annualized rate in 2024’s second and third quarters, considered an impressive result in a high-interest rate environment. Consumer spending helped fuel economic growth, which in turn benefited corporations, that continue to experience solid profit growth.
As President Joe Biden’s term wraps up, the market’s performance is comparable to that generated by markets during President Donald Trump’s first term. From the start of Biden’s term in January 2021 through December 6, 2024, the S&P 500 gained more than 60%. In Trump’s first term, the S&P 500 gained nearly 68%. While that was impressive, since 1980, Trump’s first-term record ranks as only the fifth-best market return during a four-year presidential term. The top-performing markets over four-year presidential terms during that span were: (1) Bill Clinton, 1993-1997, + 77.68%; (2) Clinton again, 1997-2001, +72.97%; (3) Barack Obama, 2009-2013, 74.80%; and (4) Ronald Reagan, 1985-1989, +68.05%.
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