The Trump Trade — What The Second Trump Presidency Could Mean For Markets

Donald Trump’s return to the Oval Office in January 2025 has reignited debate about his ‘America First’ approach and its impact on global markets. Portfolio Manager RASHAAD TAYOB gives his perspective on the Trump Trade.

Even before his formal inauguration, Donald Trump has quickly taken the reins of American policy, due to President Biden’s incapacity. This early influence — combined with a popular mandate and Republican control of Congress and the Senate — suggests that Trump could be even more forceful in pursuing his core policy objectives than he was during his first term.

LOOKING BACK TO LOOKING AHEAD

During his first term, Trump focused on three main areas: immigration, trade, and a fervent ‘America First’ agenda. He advocated lower interest rates and higher deficits to drive economic growth. Trump’s ‘MAGAnomics’ policy was to effectively run the US economy ‘hot.’ 

MAGAnomics, combined with tax cuts and stimulus spending during COVID, helped produce record low unemployment and robust economic growth — but they also ballooned the deficit and fuelled higher US debt levels. Trump inherits a different economy this time around. The US economy is already running hot under Bidenomics, which spent lavishly on the green energy transition and infrastructure rollout. The US economy is also experiencing higher interest rates, high deficits and sticky inflation.

TRUMP’S TRADE AGENDA

One of the standout features of Trump’s policy platform is his commitment to tariffs as a primary trade tool. Trump views tariffs not only as a means of reducing the US trade deficit, but also as a significant revenue generator. During his first term, he imposed tariffs selectively. He now proposes a broad-based tariff regime of 10% to 20% on many imports, and a staggering 60% on all Chinese goods.

Economic realities suggest that these tariffs invite retaliation. Reciprocal tariffs from trading partners could slow global growth and drive up consumer costs everywhere, not least in the US. In an interconnected global economy, supply chains rarely stop at national borders. Comprehensive tariffs, therefore, risk higher inflation at home, as well as reduced competitiveness for US exporters.

IMMIGRATION: TIGHTENING THE FLOW 

Under President Biden, immigration surged. This helped to moderate wage inflation by expanding the labour force, yet the social and political backlash reached a tipping point. Voters have demanded a return to stricter border controls and Trump is poised to respond by curbing unskilled immigration significantly. In theory, this should add upward pressure on wages, since a smaller labour pool means employers should pay more to attract scarce workers. Rising wages either pressure corporate margins or lead to consumer inflation if businesses pass costs on to consumers. Balancing these inflationary pressures will be a central challenge for Trump’s economic team.

GROWTH VS DEBT 

Trump’s first term unleashed a juggernaut economy supported by tax cuts and higher spending. This came at the cost of burgeoning budget deficits and debt. Now, with the deficit close to 7% of revenue and government debt far higher than it was before the pandemic, there’s limited room for new government stimulus. 

Nonetheless, Trump remains eager to deliver robust growth. He will push for additional tax cuts while championing aggressive spending plans. With bond yields already nearing 5% on US Treasury bonds maturing in 10 years, interest costs will continue to rise. Already, interest costs account for 19% of US tax revenues. Ever-higher long-bond yields are a major risk to global investment markets, where credit spreads remain tight and risk premiums surprisingly low.

AMERICA FIRST — BUT HOW FAR?

Trump’s promise to focus on domestic economic prosperity overlaps with his stated aversion to costly foreign wars. He has repeatedly emphasised that international conflicts do not serve American economic interests. He often touts the relative peace during his first term. Yet recent comments about annexing parts of Canada, Greenland, and even the Panama Canal have raised eyebrows. The comments are probably more rhetorical flourish than actual foreign policy but nevertheless could sow market uncertainty and stoke geopolitical tension. Ironically, an ‘America First’ position that rattles neighbours, allies and trading partners could undermine US interests instead if it triggers retaliatory measures or reduces global cooperation.

TARIFFS, COST CUTS AND THE BALANCING ACT 

With limited fiscal room, Trump is expected to fund new initiatives through tariffs and by cutting what he deems ‘government waste’. Reining in bureaucratic inefficiencies may sound appealing, but large-scale cost cutting faces entrenched political interests and is rarely easy to implement. Likewise, tariffs are a blunt instrument. While tariffs will generate revenue and protect certain domestic industries, they also risk reducing growth and adding to consumer prices.

MARKET IMPLICATIONS AND OUTLOOK 

The US stock market reacted positively to Trump’s win on optimism for further tax cuts and protection of key industries. However, the market appears to be pricing in a best-case scenario: one in which any trade war remains one sided, with minimal economic fallout. US stocks — especially in the tech sector — trade at historically high valuations. In our view, these valuations are not adequately reflecting the downside risks from higher tariffs, rising bond yields and sticky inflation.

The 2025 Trump Trade has undeniably added a fillip to US markets, already trading at all-time highs on the AI theme and resurgent American exceptionalism (see Did You Know?). However, the broader implications could weigh on US and global economic growth if tariff wars escalate, or if bond markets fret more about the federal debt burden and bond yields blow out. There appears to be too little focus on the downside risks of Donald Trump 2.0. We remain wary and cautious on US stock market valuations and sectors that appear to be in bubble territory.