Trump 2.0

Major news agencies have called the victory for former President Trump and control of the Senate for Republicans. While votes are still coming in, it is quite possible that President Trump will win both the popular vote and all seven swing states. Control of the House of Representatives, however, remains uncertain, but if all House races finalize at the current levels (9am CT on 11/6/2024) then Republicans would have a three-seat majority in the House.[1] Full control of Congress is crucial to Republicans for passing tax policy and fiscal spending. President Trump’s victory, however, affords near unilateral control over tariff policy. It is also worth remembering that the coming Republican-controlled Senate will be responsible for confirming the Cabinet and regulators, which are also important levers and mechanisms for policy implementation, not the least of which will be a lower regulatory touch under the coming administration.

Policy and Market Implications

The possibility of Republican sweep entails significant implications for tax policy as President Trump will strive to maintain all of the 2017 Tax Cut and Jobs Act (TCJA) tax changes plus add additional cuts such as lowering the corporate tax rate to 15% for domestic manufacturers. It remains to be seen how such a stipulation would get implemented in practice, but the stated goal is to bring manufacturing jobs back to the U.S. On net, tax policy and fiscal spending should be stimulative for the economy.

This additional stimulus, however, is not a one-way street. Tax cuts and spending proposals could see the fiscal budget deficit – already projected to be 6.5% of GDP in 2025 – explode to 8% or greater. Between, higher deficits, tariffs, and more economic stimulus, it is possible that long-term bond yields could continue to push higher even as the Federal Reserve lowered short-term interest rates. In the aftermath of the election results, the yield on the 10-year Treasury note rose from about 4.30% to 4.46%, which has pressured some interest-sensitive areas of the market such as housing and real estate stocks. If the 10-year Treasury yield remains below or around 5%, we see little spill-over effects to the broader equity market, but a significant push to 5.5% or beyond would likely result in a downward repricing of equities. This is not our base case, but we do see it as a tail risk under a Republican sweep outcome.

Tariffs will surely play a key role under President Trump’s policy framework in part because they generate revenue for the federal government to offset a portion of the tax cuts and spending initiatives. To President Trump, tariffs are also the tool to foster the return of manufacturing jobs to the United States. It is unclear, however, whether the tariff policy under a second Trump administration would simply begin and end with an across-the-board tariff of 10% or 20% (setting China aside, which would clearly be subject to much higher tariffs). On October 15^th, 2024, at the Economic Club of Chicago, former President Trump discussed tariffs at length as a means to “bring companies back to our country.” He elaborated that, “the only way you can do it is through the threat of tariffs . . . a lot higher than 10%.” The approach to tariffs under a Trump administration could range from a surprisingly benign mode of striking deals in order to bring jobs back to the U.S. to the opposite end of the spectrum where trade wars and drawn out tit-for-tat create economic disruptions. President Trump’s coming approach to tariffs remains a significant source of uncertainty, both domestically and globally, and the reaction to the U.S. election results in European markets was broadly negative.

Both infrastructure and financials are reacting positively to the election results. The coming Trump administration will be keen to cut regulation affecting these sectors and promote the build-out of the U.S. manufacturing base, electricity grid, and energy sector. We believe that President Trump will push for only limited changes to President Biden’s Inflation Reduction Act (IRA), including in areas such as clean energy credits. The momentum in U.S. infrastructure comes from public spending, fiscal stimulus bills, private sector spending, AI spending, and international inflows and should continue to be an area of thriving investment.

In summary, under a Republican sweep, the scope for changes to taxation and fiscal spending is large.  Tariff policy is likely to fit into the larger mix of initiatives, but President Trump’s approach could take different directions. While the inflation risk to tariffs is often cited and could moderate Fed rate cuts in 2025, we see this risk as relatively circumscribed. Under an optimistic scenario, tariff threats lead to dealmaking and some degree of jobs returning to the United States. In a combative scenario of escalating and protracted tit-for-tat, supply chain risk and business disruptions represent a greater risk to the global economy. The U.S. stock market welcomed a Trump victory in 2016 and is showing similar early enthusiasm. While we continue to believe the market environment is broadly positive for risk-taking, a second Trump administration entails a new set of considerations, higher octane, and a president prepared to grapple with economic forces.