Trump 2.0 is Getting Nuanced: Tariffs First, Tax Cuts Later

Macro
Charu Chanana

Chief Investment Strategist

Key points:

  • Trump 2.0 is Getting Nuanced: The initial market perception of Trump's second term as pro-growth and inflationary is being reassessed. As markets dig deeper into the evolving policy landscape, it's becoming clear that the trajectory is more complex than initially anticipated.
  • Tariffs First, Tax Cuts Later: Trump's recent cabinet appointments, including key China hawks, signal a stronger immediate focus on trade and tariffs over tax reforms. While tax cuts are likely in the pipeline, they will require congressional approval and come with fiscal constraints, making them a secondary priority for now.
  • Tariffs Are Risk Negative: The emphasis on tariffs introduces uncertainty and market volatility, particularly for sectors heavily reliant on global supply chains. High-beta stocks, including small-cap and cyclical sectors, are especially vulnerable to trade disruptions. Global markets, particularly China/Hong Kong, will feel outsized impacts as trade tensions escalate. This poses downside risks for equities, particularly those exposed to international trade.
  • USD as a Safe Haven: Amid the downside pressure on currencies like CNH and EUR due to escalating trade tensions, the US dollar benefits as a safe haven.
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As Trump’s policy stance takes shape, one thing is clear: tariffs are emerging as the top priority, signaling a potential for intensified trade frictions even before tax cuts come into play. This shift has far-reaching implications for equities, bonds, and currency markets. Here’s how investors can tactically position their portfolios in response to the new Trump playbook.

First, let’s understand the nuanced impacts of Trump’s policies that are likely to have the largest impact across asset classes.

Tariffs: Inflationary, but Growth-Negative

Trade war scenarios usually create heightened market volatility as the trade agenda escalates, which could weigh heavily on certain sectors and regions that are most exposed to tariff risks.

Market Implications

  • Equities: The focus on tariffs is generally risk-negative, hitting growth, corporate profits, and especially sectors reliant on global supply chains.
    • US Stocks: High-beta sectors and small caps (e.g., Russell 2000) are particularly vulnerable, as they’re more exposed to supply chain disruptions. Defensive sectors such as Consumer Staples, Health Care, Utilities and select retailers with less exposure to offshore production could be relatively more resilient.
    • International Markets: Expect outsized impacts on China/HK equities, given the direct trade exposure, along with broader weakness in Asia and other China proxies such as Europe and Australia.
  • Bonds: While tariffs may create some inflationary pressures, the impact on growth could offset this, supporting bonds with a possible flattening yield curve.
  • FX: The USD may benefit as a “safe haven” currency, while high-beta and cyclical currencies like EUR, CNH, AUD and MXN could weaken under trade pressure.

Tax Cuts: Pro-Growth and Inflationary

When implemented, tax cuts could boost domestic growth, benefiting US-centric sectors over globally exposed ones. The likely beneficiaries are small-cap and cyclically sensitive companies that stand to gain from a tax burden reduction.

Market Implications

  • Equities: Small-cap stocks (like those in the Russell 2000) and cyclicals could see a lift from tax cuts, but this may be tempered by broader trade and fiscal risks.
  • Bonds: Although tax cuts might nudge yields up, growth uncertainties related to tariffs could counter this effect.
  • FX: A tax-driven boost to US growth would support the USD, particularly as other economies grapple with trade-related slowdowns.

Deregulation: Less Macro, More Sectoral Impacts

Trump’s administration is also signaling a renewed focus on deregulation, which could act as a pro-business catalyst across various sectors. Deregulation is expected to streamline operations for industries like energy, finance, and manufacturing, reducing costs and potentially boosting domestic growth. However, while deregulation generally supports the business environment, its effects are nuanced across asset classes, particularly when considered alongside the ongoing tariff emphasis.

Market Implications

  • Equities: Deregulation is generally positive for US equities, especially in sectors like energy, financial services, and manufacturing where compliance costs have historically been high. These sectors could see operational efficiencies and improved profitability as regulatory burdens ease.
    • Energy: Oil and gas companies may benefit from environmental deregulation, while the clean energy sector could suffer if clean-energy tax credits are rolled back.
    • Financials: Banks and financial services may find more flexibility in lending, capital requirements, and investment activities, which could improve their bottom lines.
  • Bonds: The growth stimulus from deregulation may place modest upward pressure on bond yields if it results in higher corporate profitability and economic output.
  • FX: The deregulation-driven growth narrative does reinforce positive USD sentiment over the medium term amid a reduced need for Fed to cut rates.
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Tariff Policy Sees Urgency

Tax policy can often take longer to take shape as it needs a congressional approval. There are likely to be some members who could be concerned about the record-high debt and deficits, and in effect, the tax-policy changes that are eventually enacted could be somewhat tempered compared to campaign promises.

Trade and tariff policies in the US, meanwhile, can often be influenced and sometimes directly implemented by executive order. With cabinet picks like Marco Rubio and Mike Waltz signaling a tough stance on China, tariffs also appear to be the immediate focus for Trump’s administration.

In summary, investors should approach equities with caution, as tariff headlines are likely to be risk-negative in the near term, potentially outweighing the positive impact of tax cuts. However, regardless of the outcome, the US dollar stands to benefit from multiple supporting factors, including Trump’s tariff policies, fiscal measures, Fed actions, and geopolitical risks. This dynamic explains the continued strength in the USD, even as US equities struggle to break new highs. The dollar’s resilience is expected to persist, making it a key beneficiary of the current macroeconomic environment.

Source: Saxo

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