Trump's Economic Policies Would Be Unsettling — And Worse for Wall Street
Here's why I believe Wall Street would likely fare far worse under a second Trump administration than a Harris administration.
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The economic stakes in the upcoming presidential election could not be higher. The policy plans issued by Vice President Harris and former President Trump’s campaigns offer vastly different visions and methods to achieve prosperity. However, on a purely fiscal and economic outlook basis, Wall Street likely will be unsettled and perform worse under a second Trump administration than a Harris administration.
Below is my case.
Opinions abound on how various policies could impact the U.S. economy, but new policies will become challenging to enact either way in a divided Congress. One thing is certain, though: Tax cuts established in 2017 during the Trump administration are slated to sunset in 2025.
A divided government will cause a protracted negotiation, yet more fiscal sobriety. When Trump’s tax cuts were enacted, he declared they would pay for themselves with increased revenues from economic growth. Empirically, these tax cuts did not pay for themselves as the deficit soared pre-pandemic, rising by 70% to $984 billion in 2019 from $587 billion when Trump took office.
The Trump Plan
Tariffs
Wall Street performs best on assumptions of certainty and clarity in government policies and economic direction. Trump’s plan of across-the-board tariffs at a minimum of 10% will be inflationary, akin to a regressive consumption tax.
Under the Reciprocal Trade Agreements Act, presidents can negotiate and impose tariffs without congressional approval. Wall Street will likely buckle under the uncertainty of tariffs capriciously imposed or threatened — and retaliated against — from the executive branch. Indeed, Jamie Dimon, CEO of JPMorgan Chase JPM, has cautioned that “Trump’s views may create more uncertainty in the world.”
UBS believes the more extreme the tariff, the more stagflationary the result. Economist Paul Krugman estimates that a 20% across-the-board tariff will raise the cost of living by $3,200 for a typical family earning $80,000 — causing significant economic weakness. If such universal tariffs are imposed, UBS expects material stock market declines with the most significant impact on retailers, auto manufacturers, tech hardware, semiconductors, and select industrials.
A Compromised Fed?
Trump has claimed a willingness to strong-arm and openly challenge the Federal Reserve to lower rates. Fed Chair Powell will no doubt be replaced with a more compliant and accommodating Chair. A top Trump economic advisor advocates for congressional approval of a new Fed Chair well before Powell’s term expires in May 2026, intending to create a shadow Fed. Billionaire investor Stanley Druckenmiller has voiced concern that a shadow Fed is a “horrible idea” and gives Trump an “F” for fiscal responsibility.
While Wall Street appreciates lower rates, a Fed that lacks independence and is undermined by the administration poses broad economic dangers that could stoke inflation and markets already wary of a staggering debt load. If you combine enormous government debt and deficits with policy concerns, bond vigilantes can resurface and spike interest rates.
Proposed Tax Cuts
Trump has promised a grab bag of tax cuts that could cost greater than $10 trillion over a decade, including no tax on tips, social security, and overtime pay; tax deductible interest on car loans, newborn expenses, and generators; corporate taxes lowered from 21% to 15% on companies making products in the U.S.; ending double taxation of American’s living abroad; and Trump’s 2017 tax cuts made permanent along with the reinstatement of the SALT deduction above $10 thousand.
The only proposed pay-for to offset the lost revenue are tariffs on all imported goods and the repeal of clean energy subsidies. Of course, once in office, Trump may be more willing to advocate for government benefits cuts, like Social Security, Medicare, and Medicaid — cuts that are unpopular to campaign on. In fact, a nonpartisan budget group reported that Trump’s plans would hasten Social Security’s insolvency, triggering steep mandatory cuts to benefits.
Populist Policies
The former president has also promoted other unsettling populist policies that Wall Street would find unwelcome, such as threatening Alphabet GOOGL with prosecution, capping interest rates on credit cards, and imposing punitive tariffs on Deere & Co. DE and other Mexico importers.
A plan to deport millions of undocumented immigrants is predicted to have an adverse economic impact. Jefferies notes that the expiration of Temporary Protected Status (TPS) under Trump could lead to millions of migrants losing their ability to work, impacting sectors such as dairy, construction, hospitality, and healthcare particularly hard.
Inflation
Meanwhile, the notion that Trump’s plan will be better for inflation is fanciful, in my view. Trump’s economic proposals are no inflation elixir, likely the opposite. While it’s convenient to blame the incumbent administration for inflation on their watch and expect that Trump can offer some salve, the reality is that the seeds of inflation were planted during the pandemic. Fed Chair Powell has laid out the causes of inflation, which were global and primarily attributed to pandemic-related effects, such as pent-up demand from a skyrocketing savings rate, temporary workforce declines, supply chain snarls, employee wage increases, chip shortages, Ukraine war effect, etc.
Housing price inflation is also a pandemic-related effect. As more people worked remotely, they could live farther from cities, increasing real estate prices in suburbs and rural areas and limiting housing supply. Yet, President Biden gets unwarranted blame for inflation from a superfluous stimulus package early in his term, which certainly didn’t help, but only contributed marginally to inflation.
Trump’s economic plan promises to reduce inflation through significantly lower energy prices by increasing domestic energy supply. Anyone familiar with the energy market dynamics knows this is unrealistic. The self-correcting nature of energy prices remains in effect: When oil prices increase, the incentive to drill increases; and when energy prices decline, drilling activity usually follows suit. The U.S. is already the largest global oil producer, and oil companies are unlikely to drill far in excess of demand. On the other hand, policies that cause an economic slowdown will drag down energy prices, so that could be in the cards.
Government Regulation
Trump offers a lesser governmental regulatory approach. While fewer regulations and cutting red tape can be stimulative, negative externalities are often unaccounted for from reduced oversight of business, including environmental degradation, impaired public health, and lax corporate behavior. Note, for instance, that Boeing’s BA initial 737 MAX issues resulted from regulatory capture that allowed Boeing to cut corners.
Uncertainty Without Restraint
Trump ran in 2016 on a promise to eliminate the government deficit by the end of his term. At least, he once purported to believe in the importance of fiscal prudence. Now, amid a runaway deficit, he proposes massive tax cuts with no mention of any fiscal restraint.
Wall Street would face considerable uncertainty from a complete lack of budgetary discipline with soaring deficits. When combined with inflationary pressures from tariffs and a Fed instructed to stimulate growth, the bond market can have a considerable upheaval that would lead to market instability.
The Harris Plan
Harris offers a typical Democratic tax-and-spend plan — taxing the deepest pockets to fund domestic spending priorities for working families, first-time homeowners, small businesses, and worker training.
The stock market could correct in reaction to corporate tax increases in a blue sweep. Indeed, Bank of America BAC estimates that Harris’s proposed corporate tax increase from 21% to 28% would be a 5% hit to EPS for the S&P 500, while Trump’s proposed corporate tax cut would increase EPS by 4%.
Concerns that Harris would be unwilling to cut government spending are fair and relevant. Setting a sustainable fiscal path would allay Wall Street’s fears of the next major crisis. However, much like Trump, Harris would likely kick the can down the road in addressing the yawning deficit.
Notwithstanding Wall Street’s tradition of second-guessing every Fed move, an independent Fed contributes to market stability. During Biden’s term, he did not meet with Powell to discuss monetary policy, and Harris plans to follow the same path of Fed independence.
Dimon in the Rough?
Don’t underestimate the power a respected leader would have on Wall Street. Reportedly, Jamie Dimon is willing to serve in a Harris cabinet, likely as Treasury Secretary, in his career coda. Wall Street would seek comfort in having one of the most admired and pragmatic financial stewards running the Treasury Department and helping shape policy decisions.
The more considerable market risk I see looming is multiple contraction under Trump’s stagflationary plan than Harris’s more fiscally palatable approach. Harris’s tax plans are more a “soak-the-rich” to support working families and unlikely to have materially negative economic consequences. On the other hand, Trump’s tariffs can cause severe economic distress, especially if accompanied by starkly higher rates caused by inflation and soaring deficits.
A Wealth Tax?
While Harris has endorsed Biden’s wealth tax proposal for a minimum 25% tax on those with a net worth over $100 million, including taxing unrealized capital gains, the lack of political support has been apparent over the last few years. Nonetheless, in a blue sweep, market fears may bubble up over the possible stock liquidations necessary — especially in tech stocks — to pay a wealth tax.
Bottom Line
Generally, investing based on politics is a fool's errand. Nonetheless, Trump’s economic policies could have severe ramifications for the business outlook, and I would advocate investing with extreme caution — buying when stock weakness discounts the inherent policy risks — if Trump won a second presidential term.
Many myopic Wall Street pundits believe Trump’s policies will significantly benefit stocks if elected. Yet, with the specter of inflationary tariffs, trade wars, ballooning deficits, a compromised Fed, and a shaky bond market, I will take the under and bet against the pundits. If Harris wins, I’d expect a continuation of business as usual, so any material selloff would be a buying opportunity.
At the time of publication, Ginesin had no positions in any securities mentioned.
