How a Trump 2025 Presidency Could Reshape Stock and Bond Markets

How a Trump 2025 Presidency Could Reshape Stock and Bond Markets 

The potential impact of a Trump presidency on the markets has sparked considerable debate, with analysts speculating on how stocks and bonds might respond. Much depends on which policies ultimately materialize, as they could create both risks and opportunities. After the initial surge in the stock market post-election, investors are beginning to assess potential headwinds that could impact returns, from economic growth and monetary policy shifts to fiscal policy adjustments and geopolitical events.

At RIA Advisors, we've put together some thoughts on what we see as possible trends in the stock and bond markets for 2025.

In terms of the stock market, there is an optimistic case to be made. One priority for Trump would likely be to ensure that the Tax Cut and Jobs Act of 2017 does not expire in 2025, thereby maintaining the corporate tax rate at 21%. Beyond this, he may push for an even lower corporate tax rate, potentially aiming for the 15% rate he initially sought during his first term. If successful, this policy could especially benefit sectors like consumer discretionary and technology, which are particularly sensitive to tax changes. The financial sector, too, could see a boost, given Trump's history of favoring deregulation, which could open doors for more mergers and other investment activities. Trump's previous term saw the S&P 500 climb nearly 70%, a gain fueled in part by these kinds of pro-business policies.

From a technical standpoint, the market's bullish momentum appears strong as we move toward 2025. Projected earnings growth remains high, and the seasonal end-of-year uptick could drive further gains. Corporate buybacks, along with a phenomenon known as "performance chasing" among investors looking to maximize year-end returns, are likely to keep supporting market strength through the last two months of the year. A Morningstar analysis noted that only 18.2% of actively managed funds outperformed the cap-weighted S&P 500 in the first half of 2024. This underperformance stemmed partly from a lack of exposure to a few dominant stocks as well as a failure to include non-traditional assets.

Despite these positive signals, there are reasons for caution in the stock market. Trade policies under Trump may include higher tariffs on Chinese goods, which could disrupt supply chains and raise costs for both businesses and consumers. Cuts in government employment or spending could also slow growth more than expected, reducing the benefits of any extended tax cuts. More broadly, the biggest concern is that economic growth might slow down, hurting corporate profits. A Trump presidency may initially bring a surge of enthusiasm among investors, but this could fade if tariffs or other unpredictable policies create economic shocks that cut into corporate profits.

The bond market faces its own set of challenges. Following the announcement of a Trump victory, bonds sold off sharply, which was expected given how bonds usually react to prospects of inflation and rising interest rates. There is an assumption that Trump's administration might favor deficit spending on infrastructure and defense, which could fuel growth and higher wages, maintaining a higher inflation level than we saw between 2008 and 2020. If economic growth remains strong, the Federal Reserve will likely keep interest rates elevated. Rising rates would push bond prices down, and bonds could eventually stabilize at a higher "terminal rate," limiting their potential gains.

At RIA Advisors, we frequently discuss the strong correlation between wages, economic growth, inflation, and interest rates. Higher wages and increased economic activity can create inflationary pressures, which in turn drive interest rates higher. Thus, the bond market is understandably wary of any policies under a Trump presidency that could result in higher economic growth, leading to wage increases and inflation.

However, achieving sustainable economic growth may be harder than expected due to certain structural challenges. One such challenge is the national debt, which has reached high levels. A growing national debt diverts tax revenue away from productive investments and into debt service, diminishing returns. Increasingly high interest rates will only worsen this problem, as more tax dollars get allocated to servicing the debt rather than funding productive economic activities. Rather than spurring growth, these debt and deficit dynamics tend to suppress it, thereby reducing inflation and ultimately interest rates.

A deeper analysis reveals that long-term economic growth faces other structural issues, such as demographic changes and shifts in productivity, which Trump or any other president may struggle to influence. Aging populations and changes in workforce structure place a natural limit on growth, creating deflationary pressures that counteract inflation and limit the upward trajectory of interest rates.

In summary, a Trump presidency presents both opportunities and challenges for the stock and bond markets. The outlook for both depends heavily on which policy measures become realities. A key concern for us at RIA Advisors is the stock market's performance over the last two years, which has been well above long-term averages. The market is now overbought on a monthly basis and nearing the top of its long-term trend channel. Further gains may be overly optimistic unless we see some correction, which would be a healthy part of a long-term bull market. Since 2009, we've seen the market retest its four-year moving average multiple times—a mean reversion process that often supports sustainable growth. While this is unlikely to happen before year-end, a correction could occur later.

The trajectory of growth and inflation remains uncertain, and Trump's policies will need to pass through a heavily bipartisan Congress, with only slim majorities. The Freedom Caucus, known for its fiscal conservatism, may resist policies involving significant deficit spending, which could pose challenges for certain bills.

In the meantime, tax cuts could fuel a rally in stocks, but potential tariffs could weigh on global trade. While bonds face possible headwinds, the broader economic picture—dominated by the issues of debt, deficits, and demographics—suggests growth challenges may persist. Initial market responses to Trump's victory may bring volatility, but the journey ahead will require careful navigation of Fed policy, economic shifts, corporate earnings, and profitability risks.