Post-Election Economic and Market Outlook

Key Insights

Pro-Business Policies Counterbalanced by Inflationary Concerns. A clear signal emerging from the post-election environment is the anticipated shift toward a pro-growth, pro-business agenda. There may be some offsetting inflationary policies as well, although it’s simply too early to know definitively. Potential considerations include:

• Corporate Tax Reform: Potential reductions in corporate tax rates could increase after-tax profits, enhancing corporate cash flows and driving investments in growth areas.
• Regulatory Rollbacks: A lighter regulatory framework is expected, particularly in sectors such as financial services, energy, and healthcare. This could spur economic activity and open the door for increased capital expenditures.
• Boost for M&A and IPOs: With reduced regulatory hurdles and more favorable tax conditions, the mergers and acquisitions (M&A) landscape is likely to become more dynamic. Similarly, we could see a resurgence in initial public offerings (IPOs), especially in sectors previously held back by regulatory uncertainty. Private markets, where liquidity has been constrained, would benefit from an uptick in exit opportunities after a lengthy dry spell.
• Inflationary Concerns: Possible increases in tariffs, labor supply reduction from immigration policy changes, and continued fiscal deficits are cause for concern as being potentially inflationary, which would be a headwind on consumption and therefore a headwind to growth. However, the president elect’s newly announced Department of Government Efficiency (DOGE) is intended to identify cuts to the federal budget, which would mitigate or limit the impact of fiscal deficit pressure on inflation. The balance of these variables would also have implications for interest rates.

Tax Policy

• The 2017 Tax Cuts and Jobs Act (TCJA) provisions are set to expire in 2025, but extensions or further reductions are likely under the new administration.
• Potential further cuts across the board, or for specific sectors such as manufacturing, could bring corporate tax rates down to 15%, providing additional tailwinds to businesses. This would have a net positive boost to corporate profit margins and earnings.

Regulatory Environment

• The anticipated rollbacks could drive increased deal activity, benefiting private markets through greater liquidity and exit opportunities as lighter regulatory oversight may unlock deal-making opportunities across M&A and IPOs.
• Campaign rhetoric included intentions to repeal the Inflation Reduction Act (IRA) — rescinding unspent funds, eliminating EV tax credits, and reversing clean energy subsidies. However, while the President can influence the implementation of the IRA, significant changes or repeals would require Congressional action.
• Financials are poised to benefit from a more lenient regulatory environment, while traditional energy could result from loosening regulations and domestic energy policies supportive of additional production.
• Talk of broader government efficiency initiatives could lead to further deregulation and reduced government overhead, potentially catalyzing business growth both more broadly and in more domestically favored sectors. As announced by the Trump/Vance transition team on social media, DOGE, in particular, aims to streamline federal operations, reduce bureaucracy, and eliminate wasteful expenditures within the U.S. government. The proposed leadership of Elon Musk and Vivek Ramaswamy would be tasked with implementing structural reforms in government operations and aim to cut at least $2 trillion from the federal budget by July 4th, 2026.

Trade and Tariffs

• Trump’s proposals include sweeping tariff measures—potentially 10-20% on all imports. Some tariffs would target specific countries or goods, including potentially higher tariffs on China and EV imports, just as two examples. While these measures aim to protect domestic industries, they come with significant inflationary risks, as higher import costs may burden consumers. For context, the weighted average tariff rate in the U.S. has been well under 5% for over three decades. That said, many market participants do not expect tariffs to reach even the lower end (10%) of President-Elect Trump’s headline proposed levels.
• The ripple effects of any increase in tariffs could impact global trade dynamics, particularly with key partners like China, which may respond with retaliatory measures, further complicating the inflation outlook and global supply chains.
• Re-shoring or friend-shoring (prioritizing sourcing and manufacturing in countries that are geopolitical allies) of supply chains is likely to remain a theme.

Immigration

• Potential changes to immigration policy under the new administration could have significant economic implications. Stricter immigration controls and deportation measures may reduce the labor supply, particularly in industries reliant on immigrant workers, such as agriculture, construction, and hospitality. This could drive wage growth, adding to inflationary pressures.
• A tighter labor market might also constrain economic growth by limiting workforce availability, particularly in sectors experiencing labor shortages.
• Balancing these outcomes will be critical, as long-term demographic shifts driven by immigration are vital for sustaining economic expansion and mitigating the effects of an aging population.

Fiscal Policy and Deficits

• Both major candidates were expected to run fiscal deficits, but Trump’s policies—emphasizing tax cuts and spending increases—could widen these deficits further. In the short term, this may support private sector growth, but long-term concerns around inflation and debt sustainability remain.
• A significant question remains regarding the incoming administration’s ability to effectively reduce federal spending in a way that could offset the implications of tax cuts and spending initiatives.
• The balance of these factors will be critical in the resulting fiscal deficit/surplus.

Investment Considerations

Cutting through the noise, there is one signal that appears pervasive, and that is a pro-growth impulse headlined by lower corporate taxes and less restrictive regulation.  Markets have reacted in recent weeks to a scenario that anticipates sustained, above-average economic growth in the U.S., likely accompanied by stickier inflation as a result. Higher interest rates and a likely steeper yield curve may alter the hoped-for boost to small caps and the housing market. We estimate that the Fed’s rate-cutting path may be curtailed short of what was previously forecast.  Equities outside of the U.S. may be easily dismissed because of “U.S.-first” policies but we urge some caution in dismissing the opportunities there altogether.

We currently remain near our strategic targets for equities as heightened valuations and uncertainty around global geo-political risks persist.  For fixed income investors, we remain in an interesting situation where rate volatility has been high, but corporate spreads relative to Treasuries remain very tight.  Returns like we saw for core fixed income over the past year (near double-digits) are unlikely in the year ahead, but mid-single digit returns are possible.  A more detailed look at specific sectors that stand to be impacted by new policies will be forthcoming as greater policy clarity becomes available.

Final Thoughts

Investors should focus on what we know—which is that we don’t know how proposed policy will be enacted. That said, the likelihood of a more favorable tax and regulatory environment, albeit with potential inflationary risks, looks to be a base case outcome at this time.

We remain vigilant in monitoring emerging policy details and their implications for inflation, trade, and market sentiment. Flexibility will be key as we navigate uncertainties around trade, inflation, and fiscal policy. By staying disciplined and attuned to evolving policy dynamics, we can help our clients capitalize on opportunities while mitigating risks in this shifting economic landscape.