Deciphering the 2025 investment landscape under Trump 2.0

Deciphering the 2025 investment landscape under Trump 2.0

 

Everyone had an inkling; no one thought it would be quite as conclusive. This is of course referring to Trump’s clean sweep in the US’s November 5th election: where he secured the electoral college, the popular vote, and a few days later, congress to boot. It has handed him a powerful mandate, setting a host of policies including congressionally approved ones such as those relating to tax or spending firmly under his purview. 

Since, markets have rallied strongly in what has been referred to as the ‘Trump bump’. How much of this has been in support of the MAGA Republican’s nativist political approach or simply because they prefer certainty whichever way it swings is open to debate. But inevitably, they have been mulling what his policies mean for the economy and stocks next year and beyond. 

If campaign rhetoric is to be believed, Trump’s approach to tariffs, immigration, tax and deregulation could be a boon for corporate profits, but they could also juice the government deficit and inflation, upsetting future Fed interest rate cuts. 

Here, we explore some of the views of the macroeconomic team at Willis Towers Watson, who manage Alliance Witan, and see what Trump 2.0 may mean for markets and the portfolio in 2025.

What does the self-styled ‘Tariff Man’ have in store?

According to the man himself, ‘tariff’ is Trump’s favourite word in the English dictionary, and as someone who prides themselves as a dealmaker, he sees them as a powerful tool for crafting bilateral trade deals.

During the election he floated the idea of 60% tariffs for Chinese imports and 20% universal tariffs elsewhere, placing Europe, Canada and Mexico in the firing line too.

Since, following the announcement of Scott Bessent - an ex-hedge fund manager and Wall Street titan - as Trump’s treasury secretary pick, hopes were raised of some moderation regarding tariffs, but Trump followed almost immediately with Truth Social posts exclaiming that day one would see 25% tariffs on Canada and Mexico and a further 10% for China.

Untangling bluster and negotiating tactic from intent is tricky here. Trump describes tariffs as a way to extract rent to pay for tax cuts, but in reality, it is US companies that will be coughing up more for imports. While this could potentially make US manufactured goods more attractive, it is likely that firms, particularly those with pricing power, won’t foot the bill: the consumer will.

As a result, this could raise prices and be cause for concern next year. The inflation bogeyman has hurt US workers and likely cost Harris the election as an extension of Biden’s term. 

The non-partisan Tax Foundation examined the impact of Trump’s first term tariffs and estimated they raised costs for the average US household by $625  per year. Looking forward, they estimate that 10% universal tariffs could add another $1,253 to household costs, and 20% tariffs could add $2,045. What’s more, targeted countries are likely to levy their own tit-for-tat tariffs, potentially sparking an ongoing and spiralling trade war that continues to inflate prices. All told, they have the potential to stoke inflation, dent global GDP, and strengthen the US dollar.

That said, the team at WTW think tariffs are likely to settle at more moderate levels of between 17.5%-22.5% for China, and more narrowly for certain products from countries elsewhere, for example car imports from Mexico. 

His divisive bugbear: immigration

Immigration has been a cornerstone and rather divisive part of Trump’s campaigning, where he outlined plans to quickly enact mass deportations of illegal immigrants and restrict legal migration. It comes on the back of high immigration figures, with US net migration at 3.3m in 2023 and projected to be similar for 2024, against an average of 1.1m annualised between 2017-2022 .

Given the Republican clean sweep, the WTW team believe this could fall to 0.5m to 0.75m in 2025 – while this would slow employment and growth in the jobs market, WTW think the aggregate impact of this on US economic growth in 2025 and beyond is relatively limited.

Taxes on the chopping block

Another big policy goal was to cut both individual and corporation taxes. Given the Republican sweep, this means very likely extending 2017 cuts after they expire in 2025, cutting some smaller business taxes, e.g., interest rate deductibility, removing taxes from server tips, and limiting Biden Inflation Reduction Act incentives. However, the much-telegraphed cut to corporation taxes from 21% to 15% is unlikely according to WTW. 

For businesses, this potentially leaves more money in their pockets which could be used for investments or returned to shareholders via buybacks or dividends. The WTW team think this could moderately boost growth and stocks, and though it may initially increase the government deficit in 2025, it will lead to its decline in the following years.

How the Fed will respond

The Fed are potentially in for a rough ride during the Trump presidency. As it stands, fiscal policy is set to remain loose given the slated tax cuts and lacking enthusiasm for federal spending cuts. This could potentially stoke inflation and encourage the Fed to keep monetary policy tighter than planned, slowing projected rate cuts for 2025 and beyond and keeping the brakes on the economy. 

Trump may not like this, but the WTW team think the Fed is unlikely to respond to White House pressure. He could instead seek to influence monetary policy by choosing not to reappoint current Fed Chair Jerome Powell when his term expires in 2026 and put forward his own candidate, but the appointment requires Senate approval which lowers the risk of an unorthodox selection.

And finally, regulation…

Before 1.0, Trump claimed that for every one regulation created, two would be removed. In a speech at the end of this summer, he ratcheted this goal up a notch by saying he would remove 10 regulations for every one created. He has also referred to deregulating specific sectors, including unleashing the oilmen in his ‘Drill, baby, drill’ comments.

Regulation has a potentially material impact on specific sectors caught under policy changes. In particular, the WTW team believe Trump may aim for deregulation on energy, the environment, defence and financials, and may make smaller changes in healthcare and antitrust measures.

On antitrust, the regulators do appear to have Big Tech in their sights, and investors will be closely watching the outcomes of recent high profile cases – particularly the antitrust case brought against Google – and how far governments might be prepared to go and how much this may impact earnings given the strategic importance of tech to the US economy and its stock markets. 

As such, while there won’t necessarily be much of an overall impact on stock markets, individual companies and sectors could be significantly affected. 

How this impacts the Alliance Witan portfolio

It’s possible that equity investing may become more volatile under Trump over the next four years. But it’s important to note that much of the top-down influences on markets are more likely to stem from wider secular shifts already in play – deglobalisation, structurally higher inflation and interest rates, and emerging Big Tech regulation – than from the policy wonks in President Trump’s White House.

For the portfolio, little will change holistically: WTW will continue striving to keep the portfolio in balance across sectors, styles, and markets. For the stock pickers, judging which parts of the market will be affected may be too uncertain at this stage, but potential policy changes will be assessed as part of the fundamental analysis of stock picks. As a result, process discipline and meticulous company fundamental analysis will be more important than ever as they seek the best investments for the portfolio.

This information is for informational purposes only and should not be considered investment advice. Past performance is not a reliable indicator of future returns. The views expressed are the opinion of Towers Watson Investment Management (TWIM), the authorised Alternative Investment Fund Manager of Alliance Witan PLC, and are not intended as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell any securities. The views expressed were current as at November 2024 and are subject to change. Past performance is not indicative of future results. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. You should not assume that any investment is or will be profitable. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. 
 
TWIM is authorised and regulated by the Financial Conduct Authority. Alliance Witan PLC is listed on the London Stock Exchange and is registered in Scotland No SC1731. Registered office: River Court, 5 West Victoria Dock Road, Dundee DD1 3JT. Alliance Witan PLC is not authorised and regulated by the Financial Conduct Authority and gives no financial or investment advice.