Multi-Asset Solutions Strategy Report

Parsing the market impact of the Trump economic agenda

American flag over building

In brief

  • We anticipate the Trump economic agenda will be mostly market-friendly, though not without risks, focusing on immigration, tariffs, deregulation, and fiscal policy.
  • U.S. growth is expected to surpass global growth in 2025, especially if deregulation and fiscal policy are prioritized.
  • Inflation risks are more nuanced; tariffs may increase inflation but could also slow U.S. growth, in turn potentially capping bond yields.
  • Growth and inflation may lead to steeper yield curves, but there's a limit to the steepening as investors adjust expectations for policy rates given the solid nominal growth outlook.
  • Credit is generally supported by favorable growth, but deregulation may lead to more credit issuance for corporate activities.
  • U.S. stocks are likely winners in most cases – both in absolute and relative terms; meanwhile European equities may suffer, even if not directly targeted by tariffs.
  • A strong USD and underperformance of U.S. treasuries compared with non-U.S. bonds could be a persistent feature of the "America First" policy.

Parsing the market impact of the Trump economic agenda

On November 6 equity markets collectively delivered an endorsement of the election of Donald Trump as the 47th president of the United States, with the S&P 500 posting a gain of 2.53% - its largest one-day increase since March 2022. For a man who is widely assumed to view the S&P 500 as a key policy barometer, this performance likely emboldened his economic ambitions.

We broadly agree that the thrust of the Trump economic plan will be mostly market-friendly. But when we examine the agenda policy-by-policy, some seem certain to produce an unambiguous economic boost while others may result in a drag on growth, or sentiment, or both.

Clearly, a clean sweep of the presidency plus a Republican-controlled Congress introduces a suite of policy proposals poised to reshape the U.S. economic landscape. We see four key areas of focus: immigration, tariffs, deregulation, and fiscal policy. Each carries distinct implications for the economy and financial markets.

As investors parse the likely emphasis, and timing, of Trump’s economic plan, potential winners and losers will emerge (Exhibit 1). Already an “America First” economic policy has given renewed vigor to the U.S. exceptionalism theme that has animated global markets for several years. 

Exhibit 1: An early read on a plausible asset class impact of Trump’s economic agenda

11.27 exhibit

Source: J.P. Morgan Asset Management Multi-Asset Solutions; assessments as of November 2024

Deregulation and the fiscal boost of tax cuts are broadly positive for stocks while immigration policy shifts are mostly moderate unless they distort labor supply. By contrast, bonds face headwinds from many parts of the economic agenda, although the effect of tariff proposals on bonds could be more neutral depending on whether any resulting concerns about growth dominate inflation concerns, or vice versa.

Internationally, China is clearly a target for Trump administration tariffs, but Beijing may be able to quickly enact countervailing policy stimulus, in turn dampening the effect on Chinese asset markets. Europe, meanwhile, could well be a net loser under many proposed policies – even where the region is not the direct target of U.S. tariffs.

The scale and sequencing of Trump policies will be key. For instance, the potential negative growth impact of tariffs could be partly mitigated by the deregulation agenda. By contrast, a strong and concurrent push on tariffs and immigration could amplify the inflationary risk and growth drag from both policies.

On balance, Trump’s selection of hedge fund manager Scott Bessent as Treasury secretary implies a level of pragmatism and an awareness of market reaction. We expect that investors will help to shape both the substance and timing of specific policy goals.

Immigration policy: Will practical considerations prevail?

The Trump administration will likely move quickly on immigration policy. On the campaign trail president-elect Trump promised a mass deportation of undocumented immigrants. If it were to occur in the scale discussed, it could represent a major labor supply shock – potentially reversing the 2023 growth tailwind from the labor supply and risking a wage-price spiral. But this is not our base case. We think practical considerations – notably the current capacity of Customs and Border Control to implement additional deportations to begin with – and the prospect of a negative economic impact may moderate administration action.

Our initial estimate projects around 300,000 to 500,000 deportations annually (representing 0.2% to 0.3% of the U.S. labor force). At the margin this likely tightens labor markets, potentially driving wage growth specifically in low-skilled sectors and in industries (eg. agriculture and construction) heavily reliant on immigrant labor.

Immigration changes at this level could potentially dampen GDP growth but only at the margin, and productivity gains and/or deregulation elsewhere may act as offsets. Should curbs on immigration be greater or faster than our base case scenario, the drag on growth – and hence earnings – may increase.

Our base case scenario envisions a market impact that is broadly neutral for equity, mildly supportive for investment grade credit (as large firms are relatively less affected), and modestly negative for government bonds due to the perceived risk of wage pressure.

Tariff policy: How constrained, how conditional?

As we learned from Trump's first term, tariffs can be enacted through executive order. But given Republican control of the House and Senate until 2026, the incoming administration may choose to delay tariffs while prioritizing policies that require congressional approval. An initial round of relatively constrained tariffs could take effect around mid-2025, but with some conditionality – and the threat of worse to come – attached.

Campaign trail rhetoric – 60% tariffs on Chinese imports, 10% on all other imports – may well turn out to be the ultimate threat but not the opening round of Trump trade policy. In the near term we will likely see higher tariffs on China, though probably not reaching the 60% level. A blanket 10% tariff is possible, but it is more likely that the administration first targets a smaller group of countries (consistent with Trump’s latest comments on day-one tariffs). Despite the lack of support for tariffs across the market community – and notes of caution from the incoming Treasury secretary – we believe that they will be brought in at the very least as a negotiating tool.

The previous episode of Trump tariffs in 2018 led to noteworthy volatility in growth. Preemptive inventory stocking in 4Q17 pushed quarter-over-quarter (QoQ) real GDP to 4.6%, but by 4Q18 real GDP had dipped to just 0.6% QoQ annualized. While tariffs were not the only contributor, the combined impact of both tariffs and retaliatory measures on supply chains in industries such as agriculture, autos, manufacturing and tech hardware helped spur a 14% slide in the S&P 500 in 4Q18 – wiping out the year’s gains and leaving the index down 6% for the year.

Looking ahead, bonds could remain resilient despite tariffs if growth concerns outweigh inflationary pressures. U.S. equities might face headwinds should supply chain disruption or the impact on growth be particularly severe. And while China is likely to be the primary target of many tariffs, we believe that European equities are especially vulnerable since tariffs would weigh on the global goods cycle. That effect could be exacerbated should the Trump administration target the auto sector with specific punitive tariffs.

Deregulation: Can it foster productivity gains?

Deregulation – a broad-brush term – will likely vary by industry and company. Both U.S. political parties have hinted at increasing regulation on big tech, particularly social media platforms. But in other areas, for example cryptocurrency and artificial intelligence, the Trump team wants to position the U.S. as a global leader, suggesting less regulation in the sector.

Proposed deregulation, particularly in energy and financial services, could lower compliance costs, potentially freeing up capital for investment and innovation. However, risks include potential environmental degradation and financial instability if safeguards are weakened. The long-term growth impact hinges on whether deregulation fosters productivity gains and sustainable practices.

Financial services firms could benefit from increased corporate activity and already expect a pickup in primary market activities and M&A in 2025. Private markets may see more exits in older vintage funds, and, as a result, an increased ability to put new capital to work. Broadly, greater vibrancy in U.S. financial markets may improve corporate sentiment and present scope for renewed corporate capex and the extension of an already mature business cycle.

By contrast, deregulation in the energy sector stands to increase oil supply, in turn putting a cap on the oil price and creating a headwind for the conventional energy sector. Overall, deregulation is likely to be positive for both growth and productivity and supportive of stocks relative to bonds.

Fiscal policy: Will tax cuts spur significant growth?

Meaningful fiscal stimulus via tax cuts is likely to arrive via budget reconciliation at the end of 2025. We expect sunsetting provisions in the 2017 Tax Cuts and Jobs Act (TCJA) to be extended beyond 2025. We also see the potential for a reduction in corporate taxes from 21% to 15% for domestic production.

The prospect of a big fiscal bonanza at the end of 2025 may prove to be a case of “better to travel than arrive.” Episodes of market stress linked to the administration’s economic agenda could be ameliorated by a few well-placed comments about the tax cuts that lie ahead.

However, once legislation has passed, investors – by then accustomed to the narcotic effect of promised stimulus – may find the comedown less agreeable.

In addition, we note that while lower corporate tax rates may stimulate investment and job creation, there are questions about what tax changes would mean for the deficit. How much of the TCJA is extended will be key. Although we anticipate that Congress will address tax policy changes in the budget reconciliation process, a full extension of the TCJA could push the deficit higher. Separately – and importantly – how effectively tax cuts can drive growth will depend on the response from businesses and consumers, with potential implications for income inequality.

Assessing the overall impact on portfolios

Trump's policy agenda presents a complex interplay of potential benefits which has clearly captured investor attention, but it is not without risks. The proposals broadly aim to boost U.S. economic growth which we expect to outperform global growth in 2025.

Deregulation and the promise of tax cuts will strengthen the resilience of the U.S. economy. However, the Trump policy agenda in aggregate will likely prove mildly inflationary; if mis-calibrated or poorly implemented, the policies could spur inflation requiring a robust – and potentially damaging – monetary policy response.

The growth and inflation outlook suggests the potential for steeper yield curves and higher neutral interest rates. However, the extent of steepening may be limited as investors price out future policy rate cuts. Deregulation is broadly growth-positive and so could support credit markets; at the same time it may also lead to increased credit issuance if corporate activity picks up as we expect it will.

In most cases, U.S. stocks look poised to be clear winners, both in absolute and relative value terms, while European equities may struggle, especially under the pressure of tariffs. Trump’s "America First" policy agenda is likely to result in a strong U.S. dollar and the outperformance of non-U.S. bonds compared to U.S. Treasuries, reflecting the broader economic and policy dynamics at play.

Exhibit 2: Multi-Asset Solutions Asset Class Views

Asset ClassOpportunity SetUWNOWChangeConvictionDescription
Main asset classesEquitiesEquities — OverweightNeutralModerateGlobal growth close to trend supports ongoing earnings growth, valuations a headwind even with easing cycle in play
DurationDuration — NeutralNeutralNot applicableRate cutting cycle limits upside for yields, but market may be pricing more rate cuts than realistic given solid pace of growth
CreditCredit — OverweightNeutralLowTrend-like growth and attractive all-in yields supportive to credit despite tight levels of credit spreads
Preference by asset classEquitiesU.S. large capU.S. large cap — OverweightNeutralHighHigh quality and strong EPS but valuations, esp. in tech, are a headwind; concentration risks mitigated by cash flow generation
U.S. small capU.S. small cap — OverweightNot applicableOutlook improving as recession risk is contained, but favor profitable firms with low leverage given elevated financing rates
EuropeEurope — UnderweightNeutralModerateOngoing weakness in global goods cycle and evidence of inventory overhang in key industries hold back EU equities
JapanJapan — OverweightNeutralLowImproving earnings yield and bottom up profitability point to upside, outflows suggest that overbought conditions from mid-year are behind us
UKUK — NeutralNeutralNot applicableAttractive valuations and higher free cash flows support UK equities, but defensive nature of UK index a near term headwindNeutralNeutrala near-term headwind
AustraliaAustralia — UnderweightNeutralModerateERRs continue to lag peers but valuations expensive; soft demand for base metals a headwind to mining sector
CanadaCanada — NeutralNeutralNot applicableEconomy has shown some resilience in face of higher rates, but business outlook weak and valuations unappealing
Hong KongHong Kong — OverweightLowActivity in China remains weak and is a headwind to earnings. but valuations and positioning are supportive and increased policy responses could provide a boost
EMEM — UnderweightLowEarnings revisions very negative and flows not supportive in EM equities
Fixed IncomeU.S. treasuriesU.S. treasuries — UnderweightLowScope for fiscal stimulus and deregulation could improve U.S. growth and raise the equilibrium yield for USTs
German BundsGerman Bunds — NeutralNeutralNot applicablePotentially attractive as ECB looks set to cut rates at a decent clip, but with election risks in Feb 25 and yields already low may be at risk of volatility
JGBJGB — UnderweightNeutralLowFurther BoJ hikes coming in 2025 maintain upside risks to JGB yields but at current levels demand is likely to remain reasonable
UK GiltsUK Gilts — NeutralNot applicableWeak UK economy with scope for BoE to cut rates to offset worst impact of mortgage resets for UK consumers
Australia bondsAustralia bonds — OverweightNeutralNot applicableLeast priced in for rate cuts of the major bond markets, also postive carry is an attractive feature
Canada bondsCanada bonds — NeutralNot applicableHas rallied a lot alongside the U.S. so spreads are tight and it is also the market with the most punitive carry dynamics
BTPsBTPs — OverweightNeutralLowLower ECB rates supportive to periphery bonds but near-term risks around election cycle in Europe could mean some volatility
Corporate Inv. GradeCorporate Inv. Grade — NeutralNot applicableRobust corporate health and demand for quality carry; spreads tight, but carry advantage over sovereigns persists
Corporate High YieldCorporate High Yield — OverweightNeutralLowContained recession risks and improving quality in HY index supportive, spreads are tight but all-in yields are attractive
EMD SovereignEMD Sovereign — NeutralNeutralNot applicableFavor U.S. high yield to EMD sovereign given more fragile tail credits exposure in EMD compared to U.S. HY
CurrencyUSDUSD — OverweightNeutralModerateGrowth advantage of U.S. over RoW set to widen further, so even as Fed cutting cycle weighs on USD, growth differential is supportive
EUREUR — UnderweightNeutralModerateEUR undermined by weakness of growth in Europe and likely need for the ECB to become more aggressive in cutting rates
JPYJPY — NeutralNot applicableBoJ the only major central bank hiking rates, lends support to JPY as does solid domestic growth outlook
CHFCHF — UnderweightNeutralModerateFX interventions have been reduced, and SNB on clear easing path, CHF could end up as the lowest yielder of the majors
n/aNeutralNot applicablen/a
Not applicableNot applicableNot applicableNeutralNot applicable
Not applicableNot applicableNot applicableNeutralNot applicable
Not applicableNot applicableNot applicableNeutralNot applicable
Not applicableNot applicableNot applicableNeutralNot applicable
Not applicableNot applicableNot applicableNeutralNot applicable
Not applicableNot applicableNot applicableNeutralNot applicable
Not applicableNot applicableNot applicableNeutralNot applicable
Not applicableNot applicableNot applicableNeutralNot applicable
Not applicableNot applicableNot applicableNeutralNot applicable

The tick chart and views expressed in this note reflect the information and data available up to November 2024.

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