Khan Capital | January 2025
Key Takeaways
- Trump’s second term begins with a policy portfolio of contradictory market implications: tax cuts and deregulation are stimulative, while tariffs and immigration restriction are inflationary and growth-dampening.
- The S&P 500 rallied approximately 6% between Election Day and inauguration on expectations of a pro-business agenda, but the tariff threats have already exceeded the most hawkish pre-election forecasts.
- The $500 billion Stargate AI infrastructure announcement positioned the AI buildout as national strategic policy, reinforcing the capex narrative at a moment when the DeepSeek shock was challenging it.
- Tariffs can be imposed by executive order in days while tax cuts require months of Congressional legislation, creating an asymmetry in which markets experience the costs before the benefits.
- The Trump Trade is a sector rotation (favouring financials, energy, defence, domestic industrials, and small-caps) rather than a broad-based rally, requiring portfolio repositioning rather than simply increasing equity exposure.
Donald Trump was inaugurated as the 47th President of the United States on 20 January 2025, beginning a second term with a legislative trifecta (Republican control of the White House, Senate, and House) and a policy agenda that combines aggressive trade protectionism, immigration restriction, deregulation, and energy dominance. For financial markets, the second Trump presidency represents the most significant shift in US economic policy direction since the Reagan era, with implications that extend across every asset class and every geography.
The market’s initial response was remarkably positive. The S&P 500 had rallied approximately 6% between Election Day and inauguration, driven by expectations of tax cuts, deregulation, and a business-friendly regulatory environment. Bitcoin surged past $100,000. Small-cap stocks, represented by the Russell 2000, outperformed as investors priced in the benefits of domestic-focused policies. Bank stocks rallied on deregulation expectations. Energy stocks climbed on the “drill, baby, drill” agenda. The “Trump Trade” was in full swing.
But the optimism masks the complexity. Trump 2.0 is not a single policy; it is a portfolio of policies with contradictory market implications. Tax cuts and deregulation are stimulative and equity-positive. Tariffs are inflationary and equity-negative. Immigration restriction is labour-market tightening and potentially inflationary. Energy deregulation is deflationary for energy prices but capital-intensive. The net effect on financial markets depends on the sequencing, magnitude, and interaction of these policies, and the first days of the administration have already demonstrated that the tariff agenda will be more aggressive than the most hawkish expectations.
The Policy Matrix: What Matters for Markets
Tariffs and trade. Within his first week, Trump signed executive orders directing investigations into trade deficits with major partners and signalled forthcoming tariffs on Mexico, Canada, and China. The scale and scope of the tariff threats far exceed what was anticipated during the campaign, suggesting that trade protectionism will be a defining feature of the second term rather than an opening negotiating gambit that is quickly resolved. The market is pricing tariffs as a negative: the sectors most exposed to import costs (consumer discretionary, retail, auto manufacturers) have underperformed since inauguration.
Tax and fiscal policy. The administration is pursuing an extension and expansion of the Tax Cuts and Jobs Act (TCJA) provisions that are scheduled to expire in 2025, along with potential new tax cuts including elimination of taxes on tips and Social Security income. The proposed legislation, which will eventually become the “One Big Beautiful Bill Act,” is broadly stimulative but will significantly increase the fiscal deficit. The Congressional Budget Office’s baseline projections already show deficits exceeding $2 trillion annually; additional tax cuts without offsetting spending reductions will push that figure higher. The bond market’s willingness to finance these deficits without demanding a higher term premium is a key risk factor.
Deregulation. Financial deregulation is the most unambiguously positive element of the Trump 2.0 agenda for equity markets. Reduced regulatory burden on banks (potentially including modifications to capital requirements, stress testing, and compliance standards), energy companies (streamlined permitting, expanded drilling rights), and technology platforms (lighter antitrust and content regulation) creates direct margin and revenue benefits. The banking sector is the most immediate beneficiary: looser capital requirements expand lending capacity, higher merger activity generates advisory fees, and a more permissive antitrust environment enables consolidation.
Immigration. The administration has moved aggressively to restrict both legal and illegal immigration. From a macroeconomic perspective, reduced immigration tightens the labour market, which supports wage growth but creates inflationary pressure in labour-intensive sectors (agriculture, construction, hospitality, healthcare). The Federal Reserve has already noted that the labour force’s reduced growth rate changes the “break-even” rate of job creation needed to maintain stable unemployment, a factor that will influence monetary policy decisions throughout 2025.
Energy. “Drill, baby, drill” is the administration’s energy mantra, with executive orders directing the acceleration of oil, gas, and LNG permitting on federal lands and waters. The paradox is that increased US energy production is, at the margin, bearish for energy prices (more supply = lower prices), which benefits consumers and energy-intensive industries but hurts the profitability of the very energy companies the administration is seeking to support. The net effect on energy equities depends on whether the volume gains from increased production offset the price pressure from excess supply.
The Stargate Announcement: AI Meets Industrial Policy
One of the most significant early announcements was the $500 billion Stargate joint venture, a private-sector consortium involving OpenAI, SoftBank, Oracle, and others committed to building a network of AI data centres across the United States. The project, endorsed by Trump at a White House event, represents the largest single corporate infrastructure commitment in American history and positions the AI buildout as a national strategic priority rather than merely a private-sector investment decision.
For markets, Stargate reinforced the AI capex narrative at precisely the moment when the DeepSeek shock was challenging it. The combination of government endorsement, private-sector capital commitment, and national security framing (positioning AI infrastructure as a strategic asset in the competition with China) provided a powerful counter-narrative to the efficiency concerns raised by DeepSeek. The AI trade’s resilience through January was partly attributable to the Stargate announcement’s timing.
What the Market Is Misunderstanding
The market is pricing the benefits of Trump 2.0 faster than the costs. The post-election rally reflected the market’s enthusiasm for tax cuts, deregulation, and a pro-business regulatory environment. The tariff costs, the inflationary impact of immigration restriction, the fiscal deficit implications of unfunded tax cuts, and the potential for retaliatory trade wars have been discounted or deferred. As the policy agenda unfolds, the costs will become more visible, and the market will need to reconcile its initial optimism with a more balanced assessment.
Fed independence is a genuine risk. Trump has publicly criticised the Federal Reserve, called for lower interest rates, and signalled a desire to influence monetary policy decisions. Any perception that the Fed’s independence is being compromised, whether through appointments, public pressure, or direct interference, could trigger a significant repricing of the term premium in long-dated Treasuries. The dollar’s status as a reserve currency depends, in part, on the credibility of the central bank’s independence from political interference.
The legislative calendar creates sequencing risk. Tax cuts require Congressional action, which takes months. Tariffs can be imposed by executive order, which takes days. The asymmetry in timing means that the market will experience the costs of trade policy (tariffs, uncertainty, retaliation) before it experiences the benefits of fiscal policy (tax cuts, deregulation legislation). This creates a window of vulnerability in which the negative headlines dominate before the positive catalysts arrive.
Implications for Investors
The “Trump Trade” is a rotation, not a rally. The sectors that benefit from Trump 2.0 (financials, energy, defence, domestic industrials, small-caps) are different from the sectors that have driven the market over the past two years (mega-cap tech, AI). Investors should think of the Trump Trade as a rotation within equities rather than a broad-based bull market signal.
Tariff exposure is now a portfolio risk factor. Screen holdings for supply chain concentration in Mexico, Canada, and China. Companies with significant import exposure should be evaluated for their ability to absorb or pass through tariff costs.
Bitcoin and crypto benefit from the deregulation agenda. The administration’s crypto-friendly posture, including the appointment of industry advocates to regulatory positions and the potential establishment of a strategic bitcoin reserve, has contributed to the surge above $100,000. Regulatory clarity on crypto is a structural positive for the asset class.
Expect elevated volatility throughout the term. Policy-by-social-media, unpredictable tariff escalation and de-escalation, and the interaction of contradictory policy impulses will create a more volatile investment environment than the market’s current pricing implies. Hedging strategies, cash buffers, and geographic diversification are essential portfolio features.
Conclusion
Trump 2.0 is simultaneously the most pro-business and most disruptive economic policy agenda in modern American history. Tax cuts and deregulation create genuine tailwinds for corporate earnings. Tariffs and immigration restriction create genuine headwinds for growth and inflation. The net effect will be determined by the sequencing, magnitude, and interaction of these contradictory forces, a calculation that even the most sophisticated models cannot resolve with confidence. For investors, the task is not to predict which force will dominate but to construct portfolios that can navigate both the tailwinds and the headwinds, capturing the benefits of deregulation while hedging the risks of trade disruption. The era of policy volatility has begun.
Related Reading
For the election that brought Trump back to power, see Trump Returns: The Market’s Reaction to a Second Term. For the sector positioning implications, see The Trump Trade 2.0. For the tariff escalation that followed, see Trump’s Tariff Blitz.
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