In Trump markets, the big question is how much ‘MAGA’ 2.0 will cost

Donald Trump

Investors bracing for President Donald Trump 2.0 know two things: The new administration will seek to ram through his “Make America Great Again” agenda, and the ensuing bill could be sky-high.

The Republican victor is poised to unleash a fresh round of policies — tariffs, tax cuts, immigration crackdowns — to both boost economic growth and shield the nation from an influx of low-cost, overseas goods and workers. While Trump’s first term featured similar policies and coincided with a boom in corporate profits, these measures, implemented now, threaten to rekindle an inflation spiral that took years to quell in the aftermath of the pandemic.

Markets greeted Trump’s win with both optimism and trepidation. Stocks surged in early Wednesday trading with futures on S&P 500 climbing more than 2% on his business-friendly agenda including deregulation and activist industrial policy. No such cheer was evident in fixed income as 10-year Treasury yields spiked toward 4.5% amid anticipation that a swelling deficit under Trump will force the government to pay up for borrowing.

Higher yields could exert pressure on the risk-taking rally, by hurting interest-rate sensitive stocks and challenging new funding efforts among corporate issuers and consumers. The decade-long gain for stocks is already 35% above the norm, and risk premiums for corporate bonds are at epic lows — making the margin for error on the economy decidedly narrow.

“Stocks have the wind at their back for now, but equities will be keeping a close eye on yields,” said Adam Crisafulli, founder of market intelligence firm Vital Knowledge, who previously spent more than a decade at JPMorgan Chase & Co. “And if the Treasury slump continues, that will short circuit the Trump equity celebration.”

Then there’s a growing risk of protectionism. According to JPMorgan, boosting tariffs on China imports to 60% alone would hurt S&P 500 profits by as much as $15 a share, an amount that could wipe off almost half of 2025’s income gains. A maximal version of the tariffs plan, with the across-the-board rate at 20%, could lower US GDP by 0.8% and boost price pressures notably in the years ahead if China alone retaliates, Bloomberg Economics projects.

“A material increase in tariffs would represent the most significant departure in policy from the current administration and potentially the largest source of volatility,” JPMorgan strategists including Dubravko Lakos-Bujas wrote in a note before the election result. “The current macro backdrop is much different versus eight years ago, when the business cycle was in mid-cycle, labor market was less tight, inflation was not on the Fed’s radar, and pro-growth 1.0 policies were easier to implement and more impactful to the bottom-line.”

Yet simple narratives have a way of blowing up, particularly under Trump. While his erratic relationship with markets was a fixture of his first term — breaking norms on monetary and trade policy, in particular – risky assets were exceptionally buoyant in no small part thanks to Trump’s stimulative fiscal posture.

This time round, it’s an open question how the executive branch will manage to drive its fiscal agenda and influence soft-landing wagers in the near term, with the economy expanding at a healthy clip, inflation receding — for now — and the Federal Reserve in policy-easing mode.

While Republicans won control of the Senate, a handful of fiercely competitive US House races are still in play, raising the prospect that Trump’s Democratic rivals could force the GOP to soften its tax plans.

One thing’s for sure: In his first term, Trump trumpeted rising share prices as a scorecard on the presidency, suggesting he has every incentive to keep the bull market going. At the same time though, valuations sat at the highest level on record for an election day, raising the bar for tax cuts to juice equities anew.

Trump’s promise to cut the federal corporate tax rate to 15% from 21% would raise S&P 500 earnings by about 4%, according to a September estimate by Goldman Sachs Group Inc. strategists. But that benefit is likely to be offset by higher borrowing costs as a result of ballooning budget deficits, according to Seema Shah, chief global strategist at Principal Asset Management.

“With equity valuations already so stretched and the economy set to slow modestly, a further rise in yields, after a Trump victory, could ultimately challenge market sentiment,” she said.

Trump’s campaign plans would drive up the government budget deficit by as much as $7.75 trillion over a decade, according to estimates by the Committee for a Responsible Federal Budget, a nonpartisan fiscal watchdog group. That’s more than quadruple the current size of the deficit.

The new administration’s approach to the Fed is another wildcard with big implications for markets. Trump repeatedly voiced doubt about Fed policy and leadership. During an interview last month, he sidestepped a question about whether he would seek to remove Jerome Powell, but said it was fair game for a president to tell the central bank’s chief how he thinks interest rates should change.

While the market’s future is unknowable, what’s not for debate: As much as Trump wanted to take credit for the bull market during his first term, the America-first trade — going long US stocks and the dollar versus international assets — gained momentum well before he was elected in 2016.

The era of US supremacy began right after the 2008 financial crisis, when the Fed shifted to a rescue mode, helping sustain a prolonged economic expansion. The boom has continued under Joe Biden’s presidency with American technology megacaps leading the stay-home trade during pandemic lockdowns and the artificial intelligence craze of late.

To Chris Grisanti, chief market strategist at MAI Capital Management, a Trump victory leads to more deficits and inflation fears, though as long as corporate America is holding up, he’s going risk-on.

“I’ll take higher rates, which are generally somewhat bad for the economy, if they come with higher corporate earnings because the economy is stronger,” he said. “Markets are reflecting the belief that animal spirits will be released by the Trump presidency.”