Policy proposal

The Administration has suggested it would like to pass an omnibus budget reconciliation bill, which is the one budgetary vehicle with immunity from Senate filibusters, in the spring. Given slim majorities in Congress, this is the most likely path for tax reform. We anticipate consideration of significant tax cuts, which could include:

• Full extension of the 2017 Tax Cuts and Jobs Act (TCJA) cuts that were set to expire at the end of 2025.
• Corporate tax cut from 21% to 15% for domestic production, and a restoration of full expensing of R&D and equipment purchases for domestic producers
• Change in the $10,000 cap on SALT deductions
• Exemptions from income tax for all social security, tips and overtime income.

Of these proposals, a full extension of the TCJA, with a few changes seems most likely. However, the chance of passage of many of these individual proposals may be reduced by objections to the cost of the total legislative package. Congress will very likely attempt to reduce the costs of these proposals by, for example, raising rather than eliminating the cap on SALT deductions, pushing for new policies like limiting SALT for corporations and eliminating many tax credits created by the Inflation Reduction Act. 

Economic implications

• Growth: Real GDP would be largely unaffected in 2025, but powerful fiscal stimulus from tax cuts kicking in at the start of 2026 could boost year-over-year real GDP growth to 2.8% by the end of 2026.

Investment implications

• A corporate tax cut for domestic producers could mimic the now defunct Section 199 domestic production activities deduction, in which manufacturing and information technology benefitted the most. Finance, health care, education and other services received little benefit.
• Corporate profits of domestic producers could experience a tailwind to margins. 145 companies in the S&P 500 (representing 18% of market cap and 23% of earnings) have effective tax rates greater than 15% and greater than 80% of revenues derived domestically. Stripping out the 51 companies in traditionally service sectors, roughly under one-fifth of the S&P 500 could benefit. More mid and small cap companies, which tend to be more domestically oriented, may qualify for this tax cut. 

# of S&P 500 companies with effective tax rates >15% that generate >80% of revenues domestically

Source: Standard & Poor's, J.P. Morgan Asset Management. Based on data available for 456 of 503 companies in the S&P 500. Data are as of November 13, 2024. 

Policy proposal

On the campaign trail, the President had proposed a 60% tariff on all Chinese goods and a 10-20% universal tariff on all imports. Thus far, announced tariffs include:

• 25% on imports from Canada and Mexico, with 10% on Canadian energy imports (effective March 4)
• 10% on imports from China (in effect) + additional 10% (effective March 4)
• 25% on steel and aluminum (effective March 12)
• Reciprocal tariffs (effective as soon as April 2)
• 25% on autos, semiconductors and pharmaceutical imports (potential, effective April 2)
• Lumber and forestry products (potential, effective April 2)
• 25% on European autos and other goods (potential, effective April 2)
• 100% tariff on BRICS nations if actions are taken to de-dollarize

Goals of the tariffs include:

• Lowering trade deficit
• Raising government revenue
• Encouraging foreign investment in the U.S. and job creation
• Negotiating/extracting concessions on: drug trafficking, immigration, auto imports, defense

Economic implications

• Growth: Tariffs would reduce both imports and exports. If foreign nations retaliated with equivalent tariffs, both sides of U.S. trade could decline by equivalent percentages. Because the U.S. imports more than it exports this could add to economic growth. However, the impact of a trade war in slowing the global economy and the uncertainty and disruption caused by a further need to reroute supply chains, would likely more than negate this effect.
• Inflation: U.S. goods imports makes up 17% of consumer spending, so the higher cost of goods could be inflationary. Headline PCE inflation could rise to 2.7% y/y by 4Q25 in a one-time feed-through effect from tariffs and then drift down to 2.1% y/y by the end of 2026.
• Deficit: According to the Committee for a Responsible Federal Budget’s central estimate, tariffs could raise $2.7 trillion between 2026-2035. However, this does not include impacts to growth from retaliation or less consumer spending that could impact the deficit as a share of GDP.

Investment implications

• Uncertainty and the potential for higher rates and inflation could result in a stronger U.S. dollar, which has already been the case since the election.
• Uncertainty could foment market volatility. In 2018, a tit-for-tat trade war weighed on equity multiples despite solid earnings across most major global equity markets, producing negative returns.
• Large multinationals could face headwinds, particularly in sectors with the highest share of foreign revenue, such as technology and materials. Small caps, which tend to be more domestically oriented, should benefit on a relative basis.
• International stocks, bonds and currencies may be most vulnerable, demonstrated in 2018-2019. China in particular stands to suffer. However, over time, EM Asia ex-China is poised to capture greater share of global trade and, along with Mexico, could be destinations for friendshoring and nearshoring, respectively.
• The first bout of trade tensions undermined business confidence, subduing capex. 

Average tariff rate on U.S. goods imports for consumption

Duties collected / value of total goods imports for consumption

Source: Tax Foundation, United States International Trade Commission, U.S. Department of Commerce, J.P. Morgan Asset Management. Imports for consumption: goods brought into a country for direct use or sale in the domestic market. *Estimate is by the Tax Foundation as of October 2024 and assumes a 20% universal tariff as well as a 60% tariff on Chinese imports. May not be updated as of the latest announcements regarding tariffs and U.S. trade policy and is subject to change. Forecasts are based on current data and assumptions about future economic conditions. Actual results may differ materially due to changes in economic, market and other conditions. Guide to the Markets – U.S. Data are as of February 10, 2025.

Policy proposal

The Biden administration passed nearly 80% more financially significant rules (estimated to have $100 million or more impact to the economy; threshold raised to $200 million in 2023) throughout its term than the Trump administration did during its first term, according to George Washington University. The Trump administration is likely to attempt meaningful deregulation this time around.

The first step may be to impose a regulatory freeze, as many incoming presidents do, to assess the impact of regulations underway to determine whether to proceed with them depending on if they fit into his policy agenda. President Trump is also likely to reinstate the regulatory budget framework to promote annual cost savings, and more stringent cost-benefit analysis for regulations going forward. During his first term, the President directed agencies to eliminate two rules for each new one created. He has proposed to increase that to eliminate 10 rules for each new one.

From there, key targets of potential deregulation include:

• Finance: Post-financial crisis era regulations, Basel III and crypto assets could face some deregulation.
• Energy: The administration will likely remove restrictions on leases and permitting for oil and gas drilling. It has also proposed to rescind unspent funds from the Inflation Reduction Act, remove subsidies on renewables and electric vehicles, and roll back environmental protections.
• Health care: A long-standing goal of the President was the repeal the Affordable Care Act.
• Technology: Technology may continue to come under intense scrutiny, but focus may shift towards issues like free speech and competitiveness rather than wholesale breakups of tech companies. Influential tech leaders may emphasize an open environment for AI development that enables the U.S. to maintain its competitive edge. The Administration could expand the semiconductor export restrictions introduced during the Biden administration and increase incentives for domestic chip manufacturing.

The realities of deregulation, however, may be more sobering. It is easier not to add new regulation than to eliminate it. Not only does proposed deregulation need to go through a formal review process but it is also subject to judicial review, which has a mixed success rate.

Economic implications

• Productivity: Deregulation should boost productivity and support growth; however, any such gains are very hard to estimate.
• There could be long-term impacts to environmental and climate sustainability, as well as consumer protections.

Investment implications

• Mega cap technology companies may continue to face anti-trust litigation, although the strategic importance of many of these businesses may also protect them and limit the scope of legal action, somewhat diminishing the regulatory headwind.
• Financials stand to benefit from a rollback of post-financial crisis era regulations and Basel III.
• Energy could also benefit, although with oil production already at high capacity, this may not result in a meaningful increase in oil supply in the short run. On the other hand, renewables and EV subsidies enacted in the Inflation Reduction Act could be at risk.
• Thus far, markets have not rewarded health care for any prospects of regulatory regime change, and the Administration’s cabinet appointee has not been well-received by the markets at this stage.
• Crypto guardrails could diminish through less SEC enforcement and a relaxed regulatory framework for digital assets.
• Streamlined regulation and greater clarity could revive IPOs and M&A, creating much needed exit activity in private equity, and supporting lending and financing activity in private credit. 

Source: George Washington University's Regulatory Studies Center, Office of the Federal Register for Biden administration, Office of Information and Regulatory Affairs for all prior administrations, J.P. Morgan Asset Management. Data are as of September 6, 2024. 

Economically significant rules published by administration in first year

Cumulative number of rules

Source: George Washington University's Regulatory Studies Center, Office of the Federal Register for Biden administration, Office of Information and Regulatory Affairs for all prior administrations, J.P. Morgan Asset Management. Data are as of September 6, 2024. 

Policy proposal

Immigration efforts could prioritize increasing border security, deporting undocumented immigrants with criminal convictions and final deportation orders, and slowing or restricting legal avenues to immigrate.

Economic implications

• Jobs: Lower labor force growth due to less immigration could cut the unemployment rate to 3.9% by the end of 2025. Wages could face upward pressure as native born workers’ median wages are higher than foreign born workers.
• Growth: Over time, economic growth could be limited by constrained labor force growth.

Investment implications

• Companies could continue struggle to find enough qualified workers, a longstanding challenge.
• Higher wages could weigh on profit margins.

Labor force growth, native and immigrant contribution

Year-over-year difference, end of year, aged 16+, millions

Median weekly wages

2023

Source: BLS, FactSet, J.P. Morgan Asset Management. Labor force data are sourced from the Current Population Survey, also known as the household survey, conducted by the BLS. This survey does not ask respondents about immigration status and may include undocumented workers, although it likely undercounts the undocumented population. Guide to the Markets – U.S. Data are as of December 19, 2024.  

Policy proposal

President Trump signed a slew of executive orders to boost U.S. energy production and lower energy prices. His national energy emergency declaration will give the president broad authority to remove environmental restrictions and expedite approvals for energy infrastructure projects. In addition, notable executive orders were aimed at deregulating oil drilling in the Arctic and lifting the hold on new LNG export permit applications to help alleviate a backlog of new LNG projects, including large ones in Texas and Louisiana that have been on pause while the Biden Administration reviewed their environmental and economic impacts.

During his inaugural address, President Trump also reiterated his intentions to refill the Strategic Petroleum Reserve. The Biden Administration released 180 million barrels of crude oil from the Strategic Petroleum Reserve (SPR) to stabilize oil prices during the Russia/Ukraine war, bringing the SPR to 40-year lows in June 2023. President Trump has now pledged to refill the SPR from its current inventory of 395 million barrels to the maximum capacity of 714 million barrels; however, he will first need $24bn in funds authorized from Congress to do this.

Economic implications

Despite these changes, energy supply may not see a marked increase:

• The U.S. is already the largest producer of crude oil in the world, pumping out roughly 13.4 million barrels per day, per the EIA.
• The difference between U.S. primary energy production and consumption have reached the highest levels in history.
• Weather, geography, specialized equipment requirements and the cost to extract oil in the Arctic has historically been costly and financially unviable for many oil and gas companies.
• OPEC+ already has planned 2025 and 2026 production increases, and the world’s oil supply is expected to continue increasing in the coming years.
• The U.S. was already expected to significantly increase its world-leading LNG production in 2025 and 2026 from 90M tonnes per annum to over 140M tonnes per annum due to previously approved LNG projects to supply Europe and Asia with LNG as the regions continue cope with supply issues from the Russia/Ukraine war. 

Investment implications

• Energy companies may not want to significantly ramp up supply because it could weigh on oil prices and reduce profitability. U.S. oil exploration and production firms need oil prices above $64 on average to profitably drill a new well, leaving little room for current prices to decline.

U.S. primary energy production and consumption deficit/surplus

Diff. between production vs. consumption, quadrillion British thermal units (1952-2024*)

Source: EIA, J.P. Morgan Asset Management. British thermal unit is a measure of the heat content of fuels or energy sources. *2024 energy and consumption data are forecasted by J.P. Morgan Asset Management.

Political opinions are best expressed at the polls, not in a portfolio. One cardinal rule investors ought to follow: Don’t let how you feel about politics overrule how you think about investing.

The chart below shows a survey from the Pew Research Center asking Americans how they feel about economic conditions. The results show that Republicans often feel better about the economy under a Republican president, while similarly Democrats often feel better about the economy under a Democratic president. Investors often make portfolio decisions based on their economic outlook.

Yet, average annual returns on the S&P 500 during the Obama administration of 16.3% and during the Trump administration of 16.0% were almost identical and higher than the average return over the last 30 years of 10.4%. It is likely the macro conditions, like ultra-low interest rates enjoyed during both Obama and Trump administrations, were a more influential driver of above-average returns during those periods, rather than the policy prescriptions each president espoused.

Consumer confidence by political affiliation

Percentage of Republicans and Democrats who rate national economic conditions as excellent or good

Source: Pew Research Center, J.P. Morgan Asset Management. The survey was last conducted in September 2024. Pew Research Center asks the question: “Thinking about the nation’s economy, How would you rate economic conditions in this country today… as excellent, good, only fair, or poor?” S&P 500 returns are average annualized total returns between presidential inauguration dates and are updated monthly. Guide to the Markets – U.S. Data are as of February 10, 2025.