President-elect Donald Trump's policy promises and their potential impact on the stock market are in focus ahead of his inauguration next Monday, January 20. (This, by the way, is a stock market holiday, with markets closed in observance of Martin Luther King, Jr. Day.)
Equities rallied hard in an immediate reaction to Trump's win last November as the outcome "provided much-needed political clarity," says George Smith, portfolio strategist for LPL Financial. "The removal of election uncertainty, coupled with hopes for a pro-business environment under the new administration, boosted investor sentiment and contributed to market gains."
However, momentum stalled to start the new year, and a challenging macroeconomic backdrop could hint at continued technical troubles, says Adam Turnquist, LPL's chief technical strategist.
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Still, despite uncertainty over Trump's proposed tariff policy and ongoing geopolitical turmoil, "there are plenty of reasons to be optimistic," Turnquist adds. "The economy is holding up well, earnings are expected to grow again this year by double digits (with contributions broadening beyond the mega-cap names), while the artificial intelligence (AI) theme continues to support market enthusiasm."
Turnquist adds that the Trump administration is "expected to bring a pro-growth agenda, less regulatory oversight, and potentially lower taxes," though some of these policies could boost inflation and the U.S. deficit.
Here, we examine the second Trump administration's potential impact on the stock market and your portfolio.
Interest in crypto is expected to rise
Bitcoin and other digital currencies surged in 2024 due in part to then-candidate Trump's about-face on crypto. In his first term, Trump was not a fan, as evidenced by a July 2019 post on what was then Twitter and is now X where he said the value of cryptocurrencies is "highly volatile and based on thin air."
But, by 2024, Trump had warmed to digital assets, saying he planned to make the U.S. the "crypto capital of the planet." And World Liberty Financial, a cryptocurrency business backed by the Trump family, launched its own token in October.
While bitcoin has come off its mid-December peak above $100,000 amid some profit-taking, Wall Street anticipates another leg higher in 2025.
"[S]peculation surrounding the incoming Trump administration's potential establishment of a U.S. bitcoin reserve – an initiative analysts estimate has a 60% likelihood – could help the cryptocurrency reclaim" the key $100,000 level, says Matt Mena, crypto research strategist at 21Shares.
He adds that the bullish outlook for crypto is also getting a lift from the anticipation of a pro-crypto administration and a Congress controlled by tech-friendly Republicans. "Analysts are projecting a path to $150,000, driven by a confluence of supportive policies and increasing institutional interest," Mena says.
Trump could spark interest in new ETFs
The Trump-inspired turn toward crypto could also funnel more money into the burgeoning exchange-traded fund (ETF) market.
ETF assets jumped 28% year over year in 2024 to $10.36 trillion, driven by market gains and a record $1.12 trillion in inflows, says Aniket Ullal, head of ETF Research & Analytics at CFRA. "Growth-oriented cyclical themes like crypto and the 'Magnificent 7' dominated the best-performing ETF categories based on total returns in 2024," he adds.
And $41 billion of net new assets flowed into bitcoin and crypto ETFs, say FactSet's Director of Global Fund Analytics Elisabeth Kashner and Senior ETF Analyst of Global Fund Analytics Lois Gregson, which "underscores growing investor interest."
Kashner and Gregson add that surging interest in cryptocurrency due in part to Trump's reversal on digital assets "suggests a probable rise in the launch of trend-driven ETFs such as those combining bitcoin with hedging strategies, diversified asset class stackings, and other alternative investments for fear of missing out."
Tariffs could stall the stock market rally
A big reason stocks have sold off to start the year is investors' concern that Trump's tariff proposals – the incoming president has said he will raise tariffs on Day One – will fuel inflation.
"Most economists believe the effects will likely include a stronger dollar, higher inflation and interest rates, a decline in growth for countries that export to the U.S., and retaliation by at least some of them," writes Kiplinger contributor James K. Glassman in his feature "How to Hedge Against Tariffs."
Glassman adds that "the fallout will probably depress the profits of American companies with strong sales abroad."
Initial expectations were that the new administration would impose tariffs of up to 20% on all imports and a 60% punitive tax on Chinese imports. However, more recent reports suggest the Trump team is considering gradually increasing tariffs over time, possibly by 2% to 5% each month.
"The tactic is designed to foster acquiescence among trade partners while limiting the potential for a reacceleration in goods price pressures," says José Torres, senior economist at Interactive Brokers.
If inflation re-accelerates, the stock market may need to adjust expectations to "what could be a slower and shallower Fed rate-cutting cycle than markets are currently pricing in," LPL Financial's George Smith says.
Uncertainty over corporate tax rates could create volatility
"While the full menu of potential policy actions and their respective details remain unknown, President-elect Trump has strongly signaled his desire for lower taxes, federal budget cuts and greater deregulation," writes Morgan Stanley Investment Strategist Monica Guerra.
As for tax policy, the Trump administration and Republican-controlled Congress are widely expected to extend most expiring provisions of the 2017 Tax Cuts and Jobs Act (TCJA). Guerra notes that this has consequences for individual investors namely in the form of income tax brackets and estate and gift tax exclusions.
She points out that it's the uncertainty surrounding corporate tax cuts that could spark a selloff in stocks. Specifically, while Trump has proposed dropping the flat corporate tax rate to 15% from 21%, "fiscal concerns and the need for revenue offsets may drive lawmakers to hold the 21% corporate tax rate steady."
Guerra adds that "unchanged corporate income taxes or the consideration of other corporate tax increases to offset deficit spending could disappoint financial markets."
The bottom line
There's no way to tell for sure exactly what the Trump administration will do and what impacts the initiatives that do get through will have on the stock market.
And with the 10-year Treasury yield up 50 basis points since Trump won the election, the bond market could create boundaries to just how much the administration can do without sinking the stock market.
Still, "with uncertainties stemming from the new administration's policy initiatives and equity markets priced to perfection, there is little room for error regarding economic and earnings disappointments – particularly if the Federal Reserve (Fed) is unable to cut interest rates further should inflation surprise to the upside," says Larry Adam, chief investment officer at Raymond James.
And it's this uncertainty, he adds, that "will likely lead to higher volatility in 2025."
For market participants, this means staying the course on longer-term investment strategy. "An effective goals-based investment approach assumes unexpected twists and turns in the market are inevitable and can provide investors with the ability and confidence they need to ride out volatility, say Glenmede's Chief of Investment Strategy and Research Jason Pride and Vice President of Investment Strategy Mike Reynolds.
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