President Donald Trump's policy promises and their potential impact on the stock market are in focus after he kicked off his second administration on January 20.
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.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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. And in the days leading up to his inauguration, Trump and First Lady Melania Trump launched their own respective meme coins.
In reaction, bitcoin prices popped back up to $107,000 and Wall Street expects even more upside in 2025.
"[S]peculation surrounding the ... Trump administration's potential establishment of a U.S. bitcoin reserve – an initiative analysts estimate has a 60% likelihood – could help the cryptocurrency" surge, 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 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 on Day 1. However, more recent reports suggest the Trump team will levy 25% tariffs on Mexico and Canada on February 1.
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 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 significantly 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.
Related content
-
Three Common Cash Flow Mistakes and How to Fix ThemBetter cash flow management could have a bigger impact on your retirement savings than simply making more money. Here's how to manage that.
-
Trusts for Child Influencers: What Families Need to KnowAs video blogging, or vlogging, gains popularity (and profitability), new laws are shaping financial obligations for caregivers of young creators.
-
Three Common Cash Flow Mistakes and How to Fix Them
Better cash flow management could have a bigger impact on your retirement savings than simply making more money. Here's how to manage that.
-
Trusts for Child Influencers: What Families Need to Know
As video blogging, or vlogging, gains popularity (and profitability), new laws are shaping financial obligations for caregivers of young creators.
-
Three Easy Financial Tips to Help Make This Year a SuccessEarly in a new year is the perfect time to assess where you are financially. Start by ensuring you're protected from fraud and evaluating your investments.
-
Stock Market Today: It's Mostly Onward and Upward for EquitiesThe major U.S. equity indexes were mixed Friday but closed an eventful week for earnings and data modestly higher.
-
Airbnb Stock Soars After Revenue, Earnings Top ExpectationsAirbnb stock soared Friday after the homestay and experiences platform beat fourth-quarter revenue and earnings expectations. Here's what you need to know.
-
Roku Expects to Be Profitable Next Year and Its Stock Is SoaringRoku stock is surging Friday after the streaming platform topped Q4 expectations and said it expects to be profitable in 2026. Here's what you need to know.
-
Why Coinbase Stock Is Lower After a Blowout Earnings ReportCoinbase stock is tumbling Friday as investors take profits following the crypto platform's impressive fourth-quarter results. Here's what you need to know.
-
Are You a 'Midwestern Millionaire'? Four Retirement StrategiesMidwestern Millionaires might not live in the Midwest, but they share a saver's mindset. These strategies are for those who have saved $1 million or more.
