Trump 2.0: Expectations for the Economy and Financial Markets

In our new Must C report, a team led by Chief Economist Nathan Sheets looks at the economy Trump inherits in his return to the White House and the new unknowns introduced by his reelection.

Trump becomes president again with a U.S. economy that has been the best performing among major developed markets, powered by a resilient consumer and a strong corporate sector. Meanwhile, the global economy continues to display dogged resilience and looks poised for another year of near-trend performance.

At the same time, Trump brings new unknowns to the economic outlook. We examine a “Baseline Trump Scenario” that includes tariff hikes (especially on China), an extension of the 2017 Trump tax cuts, sharp curbs on immigration, broad deregulation of Biden-era requirements, and a potential boost to animal spirits — emotional factors that influence consumer and investor confidence. We recognize broad uncertainty around each policy area, but offer our best guesses about how these areas will evolve.

Our conclusion is that Trump’s policies represent a complicated mix of favorable and adverse supply and demand shocks. For U.S. economic growth, our forecast envisions these effects as perhaps balancing out. For U.S. prices, the effects look to skew toward some moderate upward pressures. The clear implication is that over the coming year, the Fed will need to remain alert for signs of emergent inflation pressures, and monetary policy may need to be a bit tighter.

For the rest of the world, Trump’s tariff policies are by far the largest source of concern, with countries subject to tariffs facing an adverse demand shock as their access to the U.S. market diminishes, threatening to weaken growth and lower inflation and possibly requiring non-U.S. central banks to be more stimulative with policies.

In our view, an important framing thought is that we’ve already seen Trump in the White House. During his earlier term, he was assertive in his rhetoric and policies but ultimately avoided actions that were seriously disruptive, and the economy and the markets generally performed well during his tenure.

Looking around the world, China’s economy faces significant downside risks from the possibility of large tariffs. Europe also faces a range of question marks for Trump’s second term, particularly in the areas of tariffs and security. Many of Trump’s core policy concerns also touch Latin America in one form or another, with Mexico looking most exposed but Brazil and Panama additional names to note.

Turning to financial markets, we see little worry for broader U.S. equity indexes in a targeted tariff regime, especially since many corporates were granted carve-outs in Trump 1.0 and companies can pass through these costs. On the other hand, broader tariffs could bring a more meaningful hit to margins. Equity markets outside the U.S. are likely to get hit even harder in various tariff scenarios, and felt sizable headwinds from Trump 1.0 tariffs.

From a broad perspective, asset prices in 2025 will be significantly driven by the path of Trump’s policies. Uncertainty is likely to persist and be a feature of Trump’s presidency; Trump seems to thrive in a world of ambiguity in which his political opponents and international counterparts aren’t clear about his next move. In our view, investors who stay nimble but also focused on underlying strong economic fundamentals are likely to reap benefits.

The full report, Must C: Trump 2.0 – Expectations for the Economy and Financial Markets, also includes perspectives on Trump 2.0 from other economies and regions and is available here.