Full and literal implementation in tax, trade and immigration could have unintended consequences for the economy, both in the short and long term.. A more partial implementation - which seems anticipated by the markets - could be positive for stocks and negative for bonds. However, even this more moderate path will likely result in higher government debt and higher inflation, although we believe Donald Trump would avoid reviving higher inflation as it puts the 2026 midterm elections at risk.

On the other hand, Trump would be unlikely to implement policies that could hamper growth and markets.

Commercial Policy

Donald Trump's proposed tariffs could materialize faster and more aggressively than in his first term, posing a risk to global trade and equity markets.

Trump has promised to introduce a universal 10% tariff on all imports of goods and a 50% tariff - or more - on all imports from China. If implemented, they would subtract up to 1.0% from real GDP and add up to 1.5% to the price level (more heading into 2026).

It should be noted that in order to implement tariffs, several steps must be taken or a kind of national emergency must be declared, which is quite common. In such a case, it is very likely that the Republicans will support the new U.S. president.

10% tariff not so universal

President Trump has recently argued that the customs revenue generated by the new tariffs could be an important source of revenue to fund tax cuts. However, we believe that Trump views the tariffs primarily as a means to apply pressure and force other countries to make trade concessions. In any case, U.S. exporters would continue to suffer, as other countries would respond with their own sanctions on U.S.-made goods.

Fiscal Policy

Expectations for significant fiscal expansion are low, limited by:

1. An overheated economy.
2. Concerns about U.S. public finances.
3. Long bond rates.

Thus, we consider it unlikely that Trump will push for another round of unfunded tax cuts (tariffs). (tariffs). At best, a proposal to reduce tip taxes and the corporate rate by one or two points.

There are at least three possible areas in which the new Administration and Congress could attempt to fund-at least part of the cost of these tax cuts:

1. Cutting Public Spending. Elon Musk will lead an effort to reduce spending, but here we see very little federal budget to cut. Moreover, almost every area of federal spending has powerful advocates.
2. Reduction of aid to Ukraine and NATO.
3. Revenue collection through fees.

Migration Policy

On this issue, Donald Trump has promised to end birthright citizenship and empower the National Guard to conduct mass deportations of unauthorized immigrants. If those plans were to be fully implemented from day one, they could have an impact on the real economy, possibly leading to a recession. In addition, such restrictions would increase labor market tightness and trigger a further increase in cost-push inflation in services, which is the type of inflation that has been most persistent in this cycle.

Based on the above, we have outlined the following scenarios for 2025:

Monetary policy

• Trump's policies are expected to maintain GDP growth while boosting inflation, leading the Federal Reserve (Fed) to adopt a less accommodative stance. The U.S. economy could continue to grow above its 2.0% potential if further tax cuts and regulatory easing are implemented.
• The lowest point of the monetary policy rate in 2025 would be in the range of 3.75%-4.0% (previously 3%).

10-year Treasury yield

• Projections for the end of 2025 have been revised upward to 4.5% with a floor at 4.0%.
• Expectations could moderate due to lessons from Trump's first term, where fiscal expansion was difficult to implement quickly.
• The current environment suggests limited scope for significant fiscal measures, given faster economic growth and fiscal constraints.

U.S. dollar (DXY Index)

• Strengthened projections for the dollar, driven by higher Treasury yields and weaker economic outlook in the Eurozone.
• Pressure on other currencies is anticipated.

S&P 500

• The projections remain optimistic, although with an upside of upside more limited than in the last two years, with levels of 6,500 by the end of 2025.

Stocks outside the U.S.

Less optimistic outlook for developed markets outside the U.S. due to: 

• The likelihood of a trade war under the Donald Trump administration.
• The historical underperformance of international stocks during his first term, especially after the strength of the dollar intensified.

A final message to our clients... Elections have little impact on the current and immediate macroeconomic environment, but they can have an impact on the future economic environment. Investment portfolios should be constructed to survive an election cycle. In most cases, a well-diversified, multi-asset portfolio is the best way to deal with political and macroeconomic events, and investment strategy should continue to be tailored to personal timelines, liquidity needs and risk tolerance levels.

Humberto Mora

Investment, Finance, and Business Manager; Stockbroker