Discover how tax cuts, tariffs and deregulation could shape markets and impact your investments over President Trump’s second term.
Monica Guerra, Head of Policy, Morgan Stanley Wealth Management
Daniel Kohen, U.S. Policy Strategist, Morgan Stanley Wealth Management
This communication has been produced by Morgan Stanley Wealth Management in the United States and re-published by Morgan Stanley Wealth Management Australia Pty Ltd (“Morgan Stanley Wealth Management”) (ABN 19 009 145 555, AFSL 240813), a Participant of ASX Group. This communication is not intended as an offer or solicitation in relation to any particular Financial Product.
Key Takeaways
- Trump’s re-election may lead to extension of his Tax Cuts and Jobs Act, likely increasing federal deficits while also supporting corporate valuation multiples.
- Proposed tariffs on Chinese goods, meanwhile, could raise inflation and weigh on U.S. economic growth.
- Deregulation in Trump’s second term could benefit sectors such as Energy, Financial Services, Pharmaceuticals and Cryptocurrency, while creating policy risks for clean energy and electric vehicles.
- Policy changes may stoke market volatility, but investors should stay focused on their long-term investment strategies and financial goals.
In an election with significant implications for investors, Republican presidential candidate Donald Trump has been declared the president-elect, signalling a potential continuation and expansion of policies from his first term. As the final votes are counted and the possibility of recounts looms, the focus shifts to the implications of a second Trump administration, particularly concerning tax policies, trade tariffs and deregulation efforts. Here’s what investors should be watching.
1. Taxes, Debts and Deficits
Changes to much of the 2017 Tax Cuts and Jobs Act (TCJA) provisions will be on the table in 2025, including, but not limited to, individual, corporate and capital gains tax rates. These could have meaningful consequences for individual investors and businesses, as well as for U.S. debt and deficits. A removal of the $10,000 cap limiting the state and local tax (SALT) deduction, for example, could add about $200 billion to the federal deficit. Republicans also have proposed decreasing the corporate income tax rate from 21% to as low as 15% and may seek to revive the 100% depreciation bonus. This would likely add further to the deficit, but may also boost corporate earnings and temporarily cause markets to rally on the news.
The expectation is that Trump will push to make the TCJA’s cuts permanent. However, any significant changes will require the approval of Congress, and the opportunity to address record-high debt and deficits could play a central role in negotiating provisions of a final tax bill. The Congressional Budget Office projects that the national debt could increase by $7.75 trillion over the next decade under Trump’s holistic policies (not just on taxes). With lawmakers likely to consider the balance between revenues and expenditures, the tax-policy changes that are eventually enacted may be more tempered than campaign-trail proposals.
2. Trade and Tariffs
In contrast to tax policy, which is dependent on congressional approval, trade and tariff policy in the U.S. can often be influenced and sometimes directly implemented by executive order. Taken together, Trump’s proposals to impose a 60% tariff on Chinese goods and potentially a universal 10% tariff may negatively impact economic growth and put upward pressure on inflation. More specifically, the measures could cause inflation to increase by 2.5% and GDP to decline by 0.5% in the two years following imposition, according to Bloomberg Economics.
Trump’s full trade agenda is still opaque, however, which provides a tail risk for investors; as such, should tariffs rise, Morgan Stanley’s Global Investment Office encourages investors to consider defensive sectors and stocks, such as Consumer Staples, Health Care, Utilities and select retailers with less exposure to offshore production.
3. Deregulation
Deregulation could be a major theme of a second Trump term. Although U.S. crude oil production is currently at a record level and additional supply could be a drag on oil prices, oil and natural gas producers are nonetheless likely to benefit from deregulation. For example, Trump is likely to lift a Biden administration pause on new natural-gas permitting approvals, accelerate approval timelines and create an easier permitting process.
Financial services could also see reduced regulatory burdens, potentially boosting the banking sector and enhancing merger-and-acquisition activity. Less stringent requirements in pharmaceuticals and biotechnology, meanwhile, could help those industries by prompting accelerated drug approvals. Additionally, cryptocurrencies and blockchain may see favourable treatment from a Trump administration and a Republican Congress, while the broader tech sector and AI policy may benefit from less federal scrutiny.
Conversely, certain sectors might face increased risks under Trump’s policies. The clean energy sector, in particular, could suffer if clean-energy tax credits are rolled back, despite their popularity in some Republican circles. The electric vehicle industry and related infrastructure might also see less federal support, impacting growth in this innovative sector.
Finally, some areas are likely to see bipartisan support. For instance, policies supporting the development and reshoring of the semiconductor industry, as well as broader national security concerns such as defense spending and cybersecurity, are expected to remain robust, driven by ongoing geopolitical tensions and the strategic need to reduce reliance on foreign critical materials.
Stay Focused on the Long Term
The re-election of Donald Trump introduces variables that could lead to short-term market volatility as new policies are implemented and existing ones are expanded or curtailed. Investors should consider the potential for short-term market fluctuations and stay focused on long-term investment strategies and financial goals. In the near term, this may include preparing for end-of-year portfolio adjustments and considering opportunities for tax-efficient investing.
