A Promising Start to 2025

It has been an interesting start to the 2025 trading year and President Donald Trump’s second term as President of the United States. Skepticism, cynicism, and promise abound from economists and strategists across the political landscape, with many buy-side and sell-side houses calling for another positive year in equity markets.

What we’ve gleaned from our economic vantage point is that the United States continues to be one of the most dynamic sources of growth in the world, with large quantities of capital moving from all over the globe looking for opportunities in the United States¹. Taking recent data points from the IMF, OECD, and US Federal Reserve, U.S. GDP projections show improvements from previous predictions. The IMF has recently upgraded its forecast of 2025 US GDP to 2.7%², up from 2.2%, alongside the OECD’s prediction of 2.8%³, up from 1.6%, and the Federal Reserve’s forecast of 2.1%⁴. These forecasts lead us to believe there is upside risk in the base case forecast for economic growth, capital investment, consumer spending, and infrastructure buildout as the U.S. economy continues to increase employment and push further into dynamic frontiers of innovation, leading to lasting productivity improvements—the economic fairy dust of growth.

Key Policy Challenges in 2025

Using these forecasts to underpin our structural belief in American resiliency, we do think that markets this year will have to navigate a few challenges, not to mention the headline risks that get tweeted over a weekend. Within the realm of policy, we believe a constant source of friction for markets and investors will be the following four areas:

• Taxation

• Trade

• Technology

• Deregulation

These primary policy priorities, ranging from expansive corporate tax cuts to assertive trade measures, will become the classic push-pull shapes and forces that drive investor behavior for the remainder of the year. The measures proposed represent shifts in risk/reward frameworks that will unleash cascading effects across domestic and global markets.

Taxation Policy and Market Impact

President Trump’s approach to taxation policy has been widely expected to place significant emphasis on the continuation, expansion, and permanence of the 2017 Tax Cuts and Jobs Act. Some proposed expansion measures will likely focus on reducing the corporate tax rate for domestic manufacturers to a targeted 15%, allowing for more repatriation activity from some lower-cost regions in Asia, particularly Mexico.

Recent estimates from the Congressional Budget Office, in addition to independent policy research institutes, indicate that these deeper cuts could add trillions of dollars to the national debt over the next decade, exerting upward pressure on long-term Treasury yields. The Tax Foundation sees the initial boost to GDP from these tax cuts at +0.8%⁵, even after accounting for tariff impacts. However, these tax cuts would have severe implications for government revenue, with some scenarios predicting shortfalls between $2.5 and $3 trillion from 2025–2034.

As deficits balloon, the Treasury is forced to issue greater volumes of longer-dated bonds, potentially steepening the yield curve in ways that may hamper corporate borrowing and temper risk appetites among institutional investors. Moreover, Morgan Stanley’s 2025 fixed-income outlook⁶ underscores how such deficit-financed stimulus can introduce greater duration risk into fixed-income markets, complicating portfolio construction for those reliant on liabilities with extended time horizons.

Trade Policies and Global Market Disruptions

Trump’s stance on trade seeks to implement wide-ranging tariffs, potentially in the 10–20% range on all imports, with additional levies aimed at specific countries like China, some scenarios looking at 50% tariff levels⁷. This policy thrust is designed to shelter American manufacturing from foreign competition, but in practice, it underscores the complex relationship between exchange rates, global supply chains, and consumer price inflation.

Columbia Threadneedle’s⁸ commentary on fixed-income prospects through 2025 points to the reality that protectionist measures, if mirrored by retaliatory actions, could trigger disruptions in cross-border trade flows. Supply chain bottlenecks may, in turn, lead to higher input costs for U.S. companies reliant on imported components, feeding into elevated consumer inflation. Should these inflationary pressures persist, the Federal Reserve might respond with more forceful interest rate adjustments, upending credit markets and potentially flattening the yield curve if investors begin to price in slower long-term growth.

Deregulation: Impacts on Energy and Finance

The deregulation agenda also features prominently in Trump’s blueprint, specifically in energy and finance. Environmental deregulation that paves the way for accelerated oil and gas extraction can reduce operational constraints, encouraging infrastructure projects that generate short-term economic gains. Structurally, this could create positive momentum in the oil and gas sector for the year. However, an oversupply scenario in the energy markets remains a distinct possibility, particularly when producers ramp up capacity faster than demand can absorb.

Vanguard’s January 2025 Investment and Economic Outlook⁹ suggests that, although lower energy costs can support corporate margins, market oversupply may drive commodity prices down, compressing profit margins in certain energy subsectors. Meanwhile, financial deregulation focused on loosening capital requirements and scaling back post-2008 oversight might momentarily enhance bank profitability by lowering compliance costs and freeing up balance sheets for increased lending. However, BlackRock’s latest “Taking Stock” outlook¹⁰ cautions that de-emphasizing systemic guardrails could rekindle risk appetites reminiscent of the lead-up to the global financial crisis, introducing the potential for unsustainable leverage and credit expansion over the medium term.

Fiscal Policy and Inflation Risks

A final piece of the Trump policy mosaic is the broader stance on fiscal policy and immigration, both of which can influence inflation and labor market capacity. The Office of Management and Budget’s forecasts¹¹ suggest that any large-scale government spending on infrastructure, defense, or other priorities, combined with hefty tax reductions, is likely to widen the deficit significantly. If the Treasury issues more debt, yields on government bonds could climb as global investors demand higher returns to compensate for perceived fiscal risks.

Nuveen’s most recent fixed-income commentary¹² highlights how rising yields can spill over into municipal, corporate, and emerging market bonds, sometimes at a pace that outstrips fundamentals and provokes market dislocations. The potential for higher inflation, spurred by constrained labor supply under stricter immigration policies, could further amplify these rate dynamics. JPMorgan’s Global Research outlook¹³ echoes this, noting that mounting inflation could catalyze a more hawkish Federal Reserve, raising the specter of accelerated rate hikes that weigh heavily on equity valuations and private credit conditions.

Conclusion: Balancing Growth and Risk

Pulling these strands together reveals a tapestry of both promise and peril. The promise stems from targeted tax cuts and deregulation, which can invigorate pockets of the economy, particularly in manufacturing, finance, and energy, by lowering barriers to growth and improving near-term corporate profitability. The peril emerges in the longer term, where the consequences of rising deficits, retaliatory tariffs, and rapid inflation could imperil market stability.

DWS, in its ongoing market and macro research¹⁴, reminds us that the combined effect of such policy shifts often manifests in subtle yet powerful ways through currency realignments, structural shifts in capital flows, and changing perceptions of sovereign creditworthiness. While there are unquestionably opportunities to be seized, especially in sectors poised to benefit directly from protectionist policies or deregulation, investors should maintain vigilance beyond mere headline reading.

Keeping an eye on the interplay of yield curve dynamics, credit spreads, inflation signals, and corporate borrowing patterns is crucial for constructing resilient portfolios. The general consensus emerging from multiple asset managers is that a diversified stance, agile allocation strategies, and active monitoring of potential second-order effects remain essential for navigating a policy environment that can swiftly shift from stimulus to destabilization.

Ultimately, Trump’s economic platform encapsulates the age-old tension between near-term economic incentives and long-run fiscal health. While there is upside for select industries, one cannot ignore the structural risks embedded in rising deficits, currency fluctuations, and trade disputes that can reshape the trajectory of global markets. As these policies evolve, the technical nuances spread across interest rates, capital requirements, labor market pressures, and competitive trade strategies will demand thoughtful, data-driven analysis, balanced risk management, and a holistic understanding of capital markets to seize opportunities and guard against volatility.