By  Timothy C. Murray, CFA®
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U.S. policy under Trump: What investors need to know

We explore the policy changes that could matter the most for markets and asset allocation.

February 2025, From the Field -

Key Insights
  • President Donald Trump’s second term could lead to significant changes in trade, tax and fiscal policy, and regulation.
  • These policy shifts could have important implications for markets, the economy, and specific industries in the U.S. and around the world.
  • In this dynamic environment, a top-down approach to asset allocation can be powerful when it’s combined with deep insights into individual companies.

President Donald Trump’s second term in the White House has brought a barrage of executive orders, along with an aggressive approach to trade policy that has raised concerns about a potential resurgence in inflation.

Tax and fiscal policy is another area of focus. Republican majorities in the Senate and House of Representatives suggest that expiring tax cuts, passed during Trump’s first presidential term, are likely to be extended. Whether a further reduction in the corporate tax rate can make it through Congress remains to be seen, as do the specifics of any potential cuts in government spending.

"Amid these policy uncertainties, deep fundamental research can be a critical differentiator for investing."

Amid these policy uncertainties, deep fundamental research can be a critical differentiator for investing.

When it comes to trade policy, for example, it’s critical to understand individual companies’ exposure to overseas supply chains and their potential to increase prices in response to rising costs.

In this dynamic environment, a top-down understanding of the interplay between government policy, the economy, and the outlook for different asset classes can be especially powerful when it’s combined with deep insights into industries and individual companies in the U.S. and beyond.

The list below highlights some of the key policy areas we’re watching and some of the possible implications for asset allocation.

Policy considerations and investment playbook

Tariffs

What we're watching

  • The Trump administration is likely to expand its use of tariffs to address trade imbalances that it views as a detriment to the U.S. economy. However, the situation is evolving, and there is uncertainty around some specifics.
  • China, Mexico, and Canada have been targeted with tariff increases. Tariffs on European goods and a blanket import tax have also been mentioned as possibilities. Responses from affected countries bear watching.
  • Higher import prices could boost inflation, leading to increased uncertainty about the economic outlook and monetary policy.
  • Tariffs could also be a tool for negotiating favorable trading terms or pursuing other policy objectives, such as tightening border control or increasing military spending in Europe.

Potential implications

  • (—) Concerns about a resurgence in inflation could drive significant volatility in stocks and bonds. Such a scenario would warrant caution on intermediate- to longer-duration assets.1 Small caps would be more vulnerable to rates rising or remaining higher for longer
  • (+) Equities linked to real assets, such as energy and natural resources, historically have acted as a hedge versus inflation. High yield and floating rate bonds could be relatively appealing because of their shorter duration. Some companies in the financials sector could also benefit from a steepening yield curve.
  • (—) We are cautious on emerging market assets. A slowdown in global trade could weigh on corporate earnings in these export-focused economies and add to pressure on local currencies and fiscal management.
  • (+) Signs of any de-escalation on tariffs would be viewed positively in affected markets.

Tax and Fiscal Policy

What we're watching

  • The tax cuts from Trump’s first term are likely to be extended, resulting in further deficit spending but little additional stimulus.
  • The already elevated budget deficit and need for congressional support could make it hard to pass further corporate tax cuts.
  • The effectiveness of government efficiency initiatives in reducing the magnitude of future deficit spending and their implications for the economy will also be important to monitor.

Potential implications

  • (—) Increased issuance of U.S. Treasuries to finance deficit spending could lead to upward pressure on yields.
  • (+) Small caps and value stocks could benefit if corporate tax rates were cut further.

Immigration

What we're watching

  • Stricter immigration policies could tighten the U.S. labor market, putting upward pressure on wages and prices later in 2025 and beyond.

Potential implications

  • (—) Concerns about a resurgence in inflation could drive significant volatility in stocks and bonds. Such a scenario would also warrant caution on intermediate- to longer-duration assets. Small caps would also be more vulnerable to rates rising or remaining higher for longer.
  • (+) Equities linked to real assets, such as energy and natural resources, historically have acted as a hedge versus inflation. High yield and floating rate bonds could be relatively appealing because of their shorter duration. Some companies in the financials sector could benefit from a steepening yield curve.

Deregulation

What we're watching

  • Trump’s first-term record suggests that regulatory burdens will be reduced, cutting business costs.
  • After his first term, the number of pages in the Federal Register, which tracks the flow of government regulations, fell sharply, from over 97,000 in 2016 to under 62,000 in 2017.

Potential implications

  • (+) A more business-friendly regulatory environment could favor smaller companies.
  • (+) A more permissive approach to mergers and acquisitions (M&A)2 could also create value in small caps.
  • (+) A leadership changeover at key federal agencies could bring a lighter touch to regulation and supervision of the financials sector.3

Energy

What we're watching

  • Trump is likely to renew his push to reduce the regulatory burden on fossil fuels in his second term. Rolling back tighter emission rules and drilling restrictions advanced by the Biden administration would likely be on the agenda. Permitting reform could also place more of an emphasis on fossil fuel-related infrastructure.
  • The Trump administration could seek to curb spending on tax credits for electric vehicles and renewable energy that were included in the Inflation Reduction Act (IRA), a signature piece of legislation passed during Biden’s presidency.

Potential implications

  • (+) A more supportive regulatory environment could help the oil and gas industry at the margin. However, significant growth in domestic hydrocarbon production could be a challenge because of industry consolidation and a maturing resource base.
  • (—) Companies in the electric vehicle supply chain could encounter demand headwinds. Utilities and renewable energy developers would also face uncertainties.

Health care

What we're watching

  • Fears surrounding potential policy headwinds could weigh on investor sentiment toward the sector. At this juncture, it is difficult to tell the signal from the noise.

Potential implications

  • (—) Potential cuts to Medicaid could be a headwind for managed care companies with more exposure to this market.
  • (—) The pharmaceutical industry could face challenges if the administration takes an aggressive approach to pricing negotiations for certain drugs under the Inflation Reduction Act.
  • (—) Any funding cuts for agencies that give research grants and approve drugs represent headwinds for life science tools companies.
  • (—) Rising interest rates historically have been a headwind for biotech stocks, especially earlier‑stage companies.
  • (+) Negative sentiment and undemanding valuations mean that positive surprises on any of these fronts would serve as tailwinds.
Timothy C. Murray, CFA® Tim Murray, CFA®, Capital Markets Strategist, Multi-Asset Division

Tim Murray is a capital market strategist in the Multi-Asset Division. Tim is a vice president of T. Rowe Price Associates, Inc. 
Feb 2025 From the Field Article

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1 Duration measures a bond’s sensitivity to changes in interest rates.

2 Associate Portfolio Manager Dante Pearson explored the drivers of a potential reacceleration in M&A and the risks and opportunities this trend could create in “M&A Revival Means Management Quality Matters Even More.”

3 Gil Fortgang, an associate analyst who covers Washington and regulatory policy for T. Rowe Price Investment Management, explored this topic at length in “How the U.S. Election Could Impact the Financials Sector.” 

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