U.S. policy under Trump: What investors need to know

The summer and fall brought more clarity on President Donald Trump’s trade and fiscal policies. Now investors must weigh the implications for inflation, the economy, and monetary policy.

Trade frameworks with key partners suggest that the effective tariff rate for the U.S. is likely to end up somewhere between 10% and 20%—compared with roughly 2.5% at the start of 2025.

Nevertheless, U.S. economic activity has also held up reasonably well, with real‑time barometers of growth decreasing only modestly. Here, the boom in spending on artificial intelligence (AI) has been a strong tailwind that has helped to offset prolonged sluggishness in manufacturing and housing.

Meanwhile, the tax and spending legislation that Congress passed in July should be modestly stimulative over the next few years. The question surrounds the extent to which more favorable tax treatment of capital expenditures and research and development will spur business investment.

The combination of higher tariffs, lower corporate taxes, and stricter immigration policies has helped to keep inflation expectations elevated in the U.S., contributing to concerns that higher prices could crimp corporate profit margins and consumer spending.

The labor market bears watching in this environment. Small businesses, which account for more than 70% of U.S. employment, could face pressure to lay off employees because they tend to have less pricing power and more sensitivity to the economy and interest rates.

The Federal Reserve must tread carefully as it walks the tightrope of seeking to keep inflation in check while being mindful of economic growth and the labor market. Policymakers must also contend with political pressure to lower rates. Cutting rates too much in a growing economy could add to inflationary pressures.

In this dynamic environment, a top‑down understanding of the interplay between government policy, the economy, and the outlook for different asset classes can be especially powerful when it’s combined with deep insights into industries and individual companies in the U.S. and beyond.

The following section highlights some of the key policy areas we’re watching and the possible implications for asset allocation.

Policy considerations and investment playbook

Tariffs

What we're watching

• So far, higher tariffs haven’t shown signs of being a major problem for the U.S. economy.
• Higher tariffs still could weigh on consumer spending, growth, and corporate profit margins. However, their inflationary impact should fade next year.
• Rising geopolitical tensions also pose a risk.

Potential implications

• (—) U.S. small-caps could face headwinds because they tend to hold more debt and lack pricing power, making them more sensitive to inflation, higher rates, and the economy.
• (+) We see relative opportunity in international value and international small-caps, especially in regions where fiscal spending is increasing and where monetary policy is still dovish. European and UK equities look attractive in this regard.

Tax and fiscal policy

What we're watching

• Legislation passed in early July extended expiring tax cuts from the first Trump administration and included additional items that should provide a modest fiscal stimulus over the next few years.
• Changes in tax treatment of business spending could lead to increased investment in plants, equipment, and research and development. This shift could add fuel to the spending boom on artificial intelligence.
• The extent to which corporate tax benefits stimulate spending in other parts of the economy will be important to watch.
• The prospect of increased borrowing costs from higher base interest rates and ongoing deficit spending is fueling concerns about the long‑term sustainability of U.S. public debt.

Potential implications

• (—) Increased issuance of U.S. Treasuries to finance deficit spending could lead to upward pressure on yields.
• (—) Concerns about inflation and U.S. public debt levels make us skeptical of longer-duration U.S. Treasuries as a hedge against economic weakness.
• (+) U.S. growth stocks could benefit from exposure to the AI boom. Their healthier fundamentals could provide a buffer if the economy weakens.
• (+) U.S. value stocks could benefit from expansionary fiscal policy. However, slowing economic growth would be a headwind. Their exposure to the AI revolution is limited.
• (+) In fixed income, we prefer shorter-duration assets and short-term Treasury inflation-protected securities (TIPS).

Immigration

What we're watching

• Stricter immigration policies could tighten the U.S. labor market, putting upward pressure on wages and prices.

Potential implications

• (—) U.S. small-caps could face headwinds because they tend to hold more debt and lack pricing power, making them more sensitive to inflation, higher rates, and the economy.
• (—) Concerns about a resurgence in inflation would warrant caution on intermediate- to longer‑duration¹ assets.
• (+) Equities linked to real assets, such as energy and metals, historically have acted as a hedge versus inflation. The rise of AI and growing power demand could spur demand for industrial metals, some of which are supply constrained. Gold prices could benefit from inflation fears and strong central bank demand.
• (+) In fixed income, we prefer shorter‑duration assets and short‑term TIPS.

Deregulation

What we're watching

• Trump has continued efforts from his first term to reduce burdensome regulation, cutting the costs imposed on businesses.

Potential implications

• (+) A more business-friendly regulatory environment could favor smaller companies and value stocks. Both would be sensitive to economic weakness.
• (+) Leadership changes at key federal agencies could bring a lighter touch to regulation and supervision of the financials sector.

Energy

What we're watching

• Trump has pushed to reduce the regulatory burden on fossil fuels. 
• Energy-permitting reform, along with support for additional nuclear power capacity, could gain momentum to enable the AI boom.
• Tax and spending legislation passed in early July repealed tax credits for electric vehicles that were in the Inflation Reduction Act, a signature piece of legislation passed during Biden’s presidency.

Potential implications

• (+) A more supportive regulatory environment could help the oil and gas industry at the margin. Economic weakness would be a headwind.
• (+) Select utilities could benefit to the extent that permitting reform supports spending on the grid and generation capacity.
• (+) Uranium miners could benefit from a tightening supply and demand balance as AI’s rise fuels demand for nuclear energy.
• (—) Companies in the electric vehicle supply chain could encounter demand headwinds.

Health care

What we're watching

• Fears surrounding potential policy headwinds could weigh on investor sentiment toward the sector.

Potential implications

• (—) Potential cuts to Medicaid could be a headwind for managed care companies with more exposure to this market.
• (—) The pharmaceutical industry could face challenges if the administration takes an aggressive approach to pricing negotiations for certain drugs under the Inflation Reduction Act. Tariffs also create uncertainty.
• (—) Any funding cuts for agencies that give research grants and approve drugs represent headwinds for life science tools companies. Tariffs also create uncertainty.
• (—) Rising interest rates historically have been a headwind for biotech stocks, especially earlier‑stage companies.
• (+) Positive surprises on any of these fronts would serve as tailwinds.