The Trump Effect 2.0: What Stock Investors Have Yet to Price In
Trump’s Second Term Begins: Markets Brace for Turbulence
As Donald Trump officially begins his second term as president on January 20, the nation is watching how his administration will approach the ambitious economic and policy promises made during his campaign. Trump’s pledges on issues like immigration, trade, and even cryptocurrency captured headlines, but his economic agenda remains the cornerstone of his support base and a focal point for Wall Street.
Investors are anticipating a period of uncertainty as Trump’s policies begin to take shape. Many experts suggest that the market has not yet fully accounted for the potential impacts of his initiatives. “I don’t think it’s priced in,” said Craig Sterling, head of U.S. equity research at Amundi U.S. “The market is going to pay for what it can see.”
Market Reactions Ahead of Inauguration
In the week leading up to Trump’s inauguration, the Dow Jones Industrial Average rose 3.7%, while the S&P 500 gained 2.9% and the Nasdaq Composite climbed 2.5%, according to Dow Jones market data. However, these figures represent the weakest post-election rally between Election Day and Inauguration Day since Barack Obama’s 2009 presidency during the global financial crisis.
With reports suggesting that Trump plans to issue roughly 100 executive orders shortly after taking office, three key policy areas are dominating investor attention: tariffs, deregulation, and corporate tax reform.
Tariffs: A Double-Edged Sword
Trade policy, particularly tariffs, has been a hallmark of Trump’s platform. He has floated the idea of imposing 25% tariffs on imports from Mexico and Canada and 10% tariffs on Chinese goods, signaling potential tension with key trading partners.
A report by Boston Consulting Group estimates that such tariffs could add $640 billion in costs to imports from major trade partners, significantly impacting industries reliant on global supply chains. Sectors like automotive manufacturing, apparel, and consumer electronics are particularly vulnerable to these cost increases.
The ripple effects could extend beyond businesses reliant on imports. Investors are concerned that steep tariffs might drive inflation, undoing recent Federal Reserve efforts to stabilize price levels. “Some of the tariff fears have contributed to inflation risk and upward pressure on interest rates,” noted Mike Dickson, head of research at Horizon Investments.
Deregulation: Boosting Business Confidence
Trump’s push for deregulation aims to unleash economic growth by reducing government oversight. His stated goal of eliminating ten regulations for every new one introduced has generated optimism, particularly in the financial and energy sectors.
Financial institutions stand to benefit significantly from less regulatory scrutiny. The S&P 500 Financials Sector Index surged 6.2% following Trump’s 2024 election win, with financial stocks continuing to rally in anticipation of regulatory rollbacks. Additionally, looser environmental regulations could provide a boost to the energy, materials, and industrial sectors.
Corporate Tax Reform: Lower Rates on the Horizon
Trump’s administration is also expected to focus on extending and deepening the tax cuts introduced in 2017, which lowered the corporate tax rate to 21%. Trump has proposed further reducing the rate to 15%, a move that could improve corporate profitability and investor sentiment.
Jonathan Coleman, a portfolio manager at Janus Henderson Investors, emphasized the potential upside for smaller companies. “We expect small-cap earnings growth could exceed that of large caps in 2025, aided by easier earnings comparisons,” he said, highlighting the sensitivity of smaller firms to domestic policy changes.
Looking Ahead
While Trump’s policy announcements may bring clarity to some areas, their economic impacts will take time to materialize. “The U.S. economy isn’t a speedboat—it’s a massive supertanker,” said Adrian Helfert, chief investment officer at Westwood Holdings Group. “Even with the most aggressive policy changes, turning this ship takes time.”
Although markets are closed on Inauguration Day for Martin Luther King Jr. Day, investors are bracing for volatility during the shortened trading week. Whether Trump’s second-term agenda will lead to sustained economic growth or market disruptions remains uncertain, but one thing is clear: the next few months will be critical in shaping the trajectory of both policy and market performance.
