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As Donald Trump returns to the White House, early signals suggest major shifts in tariffs, tax cuts, and immigration policy—each with potential impacts on inflation, global stability, and financial markets. While history shows that U.S. markets tend to perform regardless of political leadership, the full impact of Trump’s policies could bring new challenges and opportunities for investors globally once he is in office. For now, the initial signals provide insight into how these changes might affect investor portfolios worldwide.

Key policies

1. Trade and tariff policies
One of President-elect Trump’s campaign proposals has been to implement tariffs as high as 60% on China and 20% on goods imported from other countries. In practice, while a return to trade-tension confrontation seems likely in 2025, we believe the actual rise in tariffs may not reach the levels communicated during the election due to potential constraints he may encounter.

2. Fiscal policy
President-elect Trump’s plans to cut corporate taxation and renew the 2017 personal tax cuts that are scheduled to expire at the end of 2025 will further increase the deficit. Currently the fiscal deficit in the U.S., which stands at roughly 6.5% of GDP (gross domestic product), could face further stress if these tax policies are extended. 

3. Geopolitics
There is an increase in geopolitical uncertainty as President-elect Trump outlines his plans for ending the war in Ukraine and dealing with tensions in the Middle East. The U.S. commitment to NATO may also weaken if President-elect Trump believes other members are not spending enough on defense as a share of GDP.

Implications for investors:

• Higher U.S. bond yields
  As policies like reduced immigration and increased tariffs drive up labor costs and import prices, inflation pressures could limit the Fed’s ability to cut rates, keeping bond yields higher.
• Beneficial for U.S. small-cap stocks
  Inflationary pressures and fewer Fed rate cuts could strengthen the U.S. dollar. This, combined with a potential trade war, may boost domestic producers and small-cap stocks while posing risks to large-cap companies exposed to global trade.
• Rate cuts in the UK and Europe
  As U.S. tariffs and a renewed trade war put downward pressure on global GDP growth forecasts, in response we might see more central bank rate cuts in the UK and Europe.
• Favoring U.S. stock market
  Historically, Trump’s economic policies—particularly tax cuts and deregulation—have favored U.S. corporations, which could continue to outperform international stocks if these measures are reinvoked.

In the balance

To some degree these market movements have already been priced in. For instance, it’s unclear how much further long-term bond yields can rise, and the U.S. share market is expensive by most metrics. Compared to his last election win, President-elect Trump’s return to office has also been less unexpected, meaning there is less potential unfactored upside for portfolios.

Looking forward, one important consideration will be the sequencing of President-elect Trump’s policy agenda. An early focus on tax cuts and deregulation would be well-received by equity investors. However, investors might take fright if the first major policy moves are on tariffs and immigration. Higher bond yields from inflation fears could also be a headwind for stock markets. 

Crucially, there are two potential constraints we see on President-elect Trump. The first is inflation. One clear conclusion from the election is that U.S. voters, in a similar dynamic to other countries globally, were upset by the price rises during the Biden presidency. President-elect Trump could soften his policy stance if tariffs, immigration, or tax start to trigger higher inflation. The second is that President-elect Trump is still likely to see the stock market as a measure of his success and potentially move less aggressively if the market starts to correct. 

The bottom line

The re-election of Donald Trump is poised to bring shifts in trade, fiscal, and geopolitical policies that could generate significant market movement. While increased tariffs and reduced immigration may pose inflationary pressures, the potential for tax cuts and deregulation could benefit specific sectors, notably small-cap U.S. stocks. Therefore, we believe investors should be prepared for possible market volatility but remain focused on long-term strategies.

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How Small Cap Managers Are Adjusting Their Portfolios In The Wake Of The U.S. Elections
4 Key Watchpoints For Investors In A Second Trump Presidency
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