Investors bracing for President Donald Trump 2.0 know two things: The new administration will seek to ram through his "Make America Great Again" agenda, and the ensuing bill could be sky-high.
The Republican victor is poised to unleash a fresh round of policies — tariffs, tax cuts, immigration crackdowns — to both boost economic growth and shield the nation from an influx of low-cost, overseas goods and workers.
While Trump's first term featured similar policies and coincided with a boom in corporate profits, these measures, implemented now, threaten to rekindle an inflation spiral that took years to quell in the aftermath of the pandemic.
Markets greeted Trump's win with both optimism and trepidation. Stocks surged in early Wednesday trading with futures on S&P 500 climbing more than 2% on his business-friendly agenda including deregulation and activist industrial policy.
No such cheer was evident in fixed income as 10-year Treasury yields spiked toward 4.5% amid anticipation that a swelling deficit under Trump will force the government to pay up for borrowing.
Higher yields could exert pressure on the risk-taking rally, by hurting interest-rate sensitive stocks and challenging new funding efforts among corporate issuers and consumers. The decade-long gain for stocks is already 35% above the norm, and risk premiums for corporate bonds are at epic lows — making the margin for error on the economy decidedly narrow.
"Stocks have the wind at their back for now, but equities will be keeping a close eye on yields," said Adam Crisafulli, founder of market intelligence firm Vital Knowledge, who previously spent more than a decade at JPMorgan Chase & Co. "And if the Treasury slump continues, that will short circuit the Trump equity celebration."
Then there's a growing risk of protectionism. According to JPMorgan, boosting tariffs on China imports to 60% alone would hurt S&P 500 profits by as much as $15 a share, an amount that could wipe off almost half of 2025's income gains.
A maximal version of the tariffs plan, with the across-the-board rate at 20%, could lower U.S. GDP by 0.8% and boost price pressures notably in the years ahead if China alone retaliates, Bloomberg Economics projects.
"A material increase in tariffs would represent the most significant departure in policy from the current administration and potentially the largest source of volatility," JPMorgan strategists including Dubravko Lakos-Bujas wrote in a note before the election result.
"The current macro backdrop is much different versus eight years ago, when the business cycle was in mid-cycle, labor market was less tight, inflation was not on the Fed's radar, and pro-growth 1.0 policies were easier to implement and more impactful to the bottom-line."
Yet simple narratives have a way of blowing up, particularly under Trump. While his erratic relationship with markets was a fixture of his first term — breaking norms on monetary and trade policy, in particular – risky assets were exceptionally buoyant in no small part thanks to Trump's stimulative fiscal posture.
This time round, it's an open question how the executive branch will manage to drive its fiscal agenda and influence soft-landing wagers in the near term, with the economy expanding at a healthy clip, inflation receding — for now — and the Federal Reserve in policy-easing mode.
