Trump’s Second Term Begins: Investors Brace for Markets Volatility
As Donald Trump begins his second term as president of the United States on January 20, all eyes are on how his policy agenda will shape the economy and markets. During his campaign, Trump made bold promises on issues like immigration, international trade, and even cryptocurrency. However, it was his economic platform that arguably played a pivotal role in securing his victory.
Now, investors and Wall Street are anxiously awaiting how these promises translate into actionable policies. The uncertainty surrounding Trump’s plans has left markets on edge, with some experts warning that the impacts are not yet fully reflected in asset prices.
Craig Sterling, head of U.S. equity research at Amundi U.S., noted, “I don’t think it’s priced in,” referring to upcoming policy changes. “The market is going to pay for what it can see,” he added, highlighting the difficulty of accounting for unknowns in current valuations.
Markets React to Uncertainty Ahead of the inauguration, markets showed mixed reactions. The Dow Jones Industrial Average rose 3.7% in the week prior, with the S&P 500 up 2.9% and the Nasdaq Composite gaining 2.5%, according to Dow Jones market data.
However, these gains mark one of the weakest post-election performances since the 2008 financial crisis. As Trump reportedly prepares to issue around 100 executive orders, investors are focusing on three key policy areas: tariffs, deregulation, and corporate tax cuts.
Tariffs
Trade Tensions Loom Trump’s strong stance on tariffs remains a central point of debate. The president has suggested imposing 25% tariffs on goods from Mexico and Canada, and a 10% tariff on Chinese imports. These measures could lead to increased costs for U.S. businesses and exacerbate trade tensions with key partners.
A Boston Consulting Group report estimates that tariffs could add $640 billion in costs to U.S. imports from major trading partners. Industries heavily reliant on imports—such as automotive, clothing, and consumer electronics—are particularly vulnerable.
There’s also concern that higher tariffs could drive inflation, just as the Federal Reserve has made progress in controlling it post-pandemic. “Some tariff fears have contributed to inflation risk and upward pressure on interest rates,” said Mike Dickson, head of research at Horizon Investments.
Deregulation
Boosting Business Sentiment Trump’s pledge to cut ten regulations for every new one has energized sectors like finance and energy. Suzanne P. Clark, CEO of the U.S. Chamber of Commerce, said deregulation could “set the economy’s animal spirits free.” Financial institutions, in particular, stand to benefit from a rollback in regulatory oversight.
Stocks in the financial sector surged after Trump’s election win, with the S&P 500 Financials Sector Index climbing 6.2% immediately after Election Day. Similarly, looser environmental regulations could benefit energy, materials, and industrial sectors, potentially spurring growth for U.S. manufacturers.
Taxes
Renewed Focus on Corporate Cuts The 2017 tax reforms, which lowered corporate taxes to 21%, are set to expire in 2025. Trump has indicated plans to extend these cuts and potentially reduce the rate further to 15%. Lower taxes could provide significant tailwinds for businesses by reducing costs and improving profit margins.
Jonathan Coleman, a small-cap portfolio manager at Janus Henderson Investors, believes these measures could particularly benefit small-cap stocks, which are more sensitive to domestic economic changes. “We expect small-cap earnings growth could exceed that of large caps in 2025,” he said.
A Long Road Ahead
Despite the flurry of activity expected in Trump’s early days, significant economic shifts take time. Adrian Helfert, CIO at Westwood Holdings Group, likened the U.S. economy to a “massive supertanker,” emphasizing that even aggressive policy changes won’t yield immediate results.
With markets closed on Inauguration Day for Martin Luther King Jr. Day, investors are bracing for potential volatility during the shortened trading week. Whether Trump’s policies lead to sustained growth or market turbulence remains to be seen. One thing is certain: the road ahead will be closely watched by Wall Street and beyond.
