Key Takeaways
Compared to Joe Biden’s four years ago, Donald Trump’s inauguration on Monday, Jan. 20, brings significantly more uncertainty, with major question marks hanging over how he will approach international trade and domestic policy.
Yet despite concerns over the impact of expected tariffs, the U.S. economic outlook remains generally optimistic.
One of the biggest variables in any economic forecast for the year ahead is the scope and impact of tariffs Trump has promised to impose on imported goods.
Among the potential tariff regimes Trump has floated during the last year, some would have a far greater impact on American businesses and consumers than others.
The most extreme scenario would see a flat 20% fee levied on all imports, raising to 60% for goods from China. In all likelihood, such a move would be highly inflationary and prompt retaliatory tariffs that could hurt U.S. exporters.
The economic fallout from tariffs could also extend to the stock market. However, the threat of a market crash is likely to temper Trump’s more protectionist instincts. Moreover, Wall Street’s strong post-election performance suggests traders expect the ultimate tariff package to be more palatable to international commerce.
An Aviva Investors note shared with CCN concluded that the potential impact of different tariff regimes ranges “from benign to highly damaging”.
“The developments around U.S. Tariffs will be a particularly important area to watch with regards to the global economic outlook over the next twelve months,” observed Aviva Investors Chief Economist Michael Grady.
Although he said it remains to be seen whether some of the proposed levies actually materialize, “whatever the outcome, we would expect some response from countries that are impacted, leading to a tense and uncertain policy environment that will ultimately weigh on global growth.”
Yet despite the risk, Aviva analysts remain confident in the strength of the American stock market and advise entering 2025 with a high exposure to U.S. equities.
Although many economists have warned about the potential for tariffs to inhibit growth, Wall Street bullishness suggests a more optimistic mood about the incoming presidency.
Despite a COVID-induced stock market crash in 2020, Trump’s first term saw the total market capitalization of the S&P 500 increase by nearly 70% .
The most significant economic legacy from those four years is probably the 2017 Tax Cuts and Jobs Act, which reduced tax rates for many American businesses and individuals.
Back then, significant cuts to corporation tax created an immediate lift for the stock market, boosting companies’ net profits and spurring an estimated 11% spike in corporate investment.
With Trump in the White House and Republicans in control of both chambers of Congress, further tax cuts are expected to be high up on the government’s policy agenda going forward.
A top priority will be to extend the expiring Tax Cuts and Jobs Act, cementing the lower taxes favored by Republicans into the 2030s.
Another item on the agenda that has bipartisan support is expanding deductions for state and local taxes. Such a policy would be especially impactful for residents of high-tax states like New York, who can currently only claw back a maximum of $10,000 from their federal tax bill.
While efforts to put more money in Americans’ pockets may spur consumer spending, extending the 2017 corporate tax cuts would provide a major boost to the stock market, which is already running hot in anticipation of such an extension.
As long as tax cuts are fully costed, their effect on economic growth is likely to be positive. But how they will be felt in real terms by Americans who may also face rising prices and declining public benefits is much more complicated.
Like his vision for tariffs, Trump’s tax agenda is riddled with uncertainty, mostly because any major overhaul will need to be agreed by Republicans in Congress who are increasingly ideologically divided.
While the party is generally in favor of lowering taxes, lawmakers don’t agree on the best way to fund tax cuts. For example, while many close to Trump favor increasing public borrowing, traditional conservatives balk at the idea.
Ultimately, some cuts to government spending are probably inevitable. But once again, there is little agreement on which budgets should be slashed.