Opinion: Market implications of a second Trump presidency

Don Davis

President-elect Donald Trump’s victory in the 2024 election generated a strong market reaction. In addition to a decisive win in the presidential race, Republicans gained control of the Senate, while maintaining its majority in the House of Representatives. The election outcome led to rallies in U.S. equity markets, with several benchmarks setting record highs following Election Day.

As Trump prepares to be sworn in as the 47th president of the U.S. on Jan. 20, 2025, he is set to inherit a strong economy, characterized by robust growth opportunities, low unemployment and positive financial markets.

With this backdrop in mind, what are the potential implications of a second Trump presidency and possible market reaction?

On the economic front, look for continued moderate economic activity in 2025, sticky inflation and a slight decrease in unemployment. However, inflationary pressures are likely to prevent significant interest rate cuts from the Federal Reserve, which will keep both short-term and long-term interest rates elevated compared to prior market expectations.

Economic growth, inflation, employment
The agenda of a second Trump administration could have a stimulating effect on the U.S. economy in 2025 and into 2026. Near-term economic activity may cool on a year-over-year basis but U.S. economic expansion in 2025 could grow in the 2-2.5% range.

With current inflation levels remaining persistently higher than the Fed’s 2% inflation target, the U.S. central bank has adopted a more cautious posture on interest rates.

Following the Fed’s December meeting, Chair Jerome Powell announced just two rate cuts projected for 2025, down from the four cuts the Fed projected this past September. This may spark friction between the Fed and the incoming administration as Trump’s proposed policies regarding trade and tariffs could create inflationary pressure.

Economic expansion typically leads to job creation, though a second Trump administration may influence this dynamic through its immigration policies. If there are fewer new workers entering the workforce, the labor market is likely to tighten, putting upward pressure on wage inflation.

U.S. equity markets response
Cyclical forces in the economy appear to be becoming more balanced. Improving fundamentals like real economic growth, the labor market, cooling inflationary pressures and lower interest rates can be catalysts to drive corporate earnings and equity prices higher.

Looking at fiscal policy, Trump proposed several tax policy ideas during the campaign. These include extending or making permanent the provisions under the 2017 Tax Cuts and Jobs Act and reinstating certain state and local tax deductions. While tax reductions for corporations and affluent individuals may boost investment and economic growth, they could increase the national debt, potentially posing longer-term risks to the economy.

In 2024, corporate earnings were robust, growing at an approximate 9.5% rate. This trend is likely to continue next year, even with a slight cooling in economic activity. Corporate earnings growth could be in the range of 9% to 12% in 2025, which would be supportive of higher stock prices.

Resilient economic fundamentals coupled with monetary and fiscal policy tailwinds offer an environment that could further support a broader equity rally in 2025. Still, as new policies are debated, uncertainty will likely create volatility in the financial markets.

While the economy is poised for moderate growth next year, inflationary pressures and interest rates will remain key factors influencing economic growth and market performance.

Don Davis is a senior portfolio manager with Commerce Trust. He can be reached at don.davis@commercebank.com.