asset allocation | august 7, 2025
U.S. policy under Trump: What investors need to know
We explore the policy changes that could matter the most for markets and asset allocation.
Key Insights
President Donald Trump’s second term is bringing significant changes in trade, tax and fiscal policy, and regulation.
These policy shifts could have important implications for markets, the economy, and specific industries in the U.S. and around the world.
In this dynamic environment, a top-down approach to asset allocation can be powerful when it’s combined with deep insights into individual companies.
Tim Murray, CFA®
Capital Markets Strategist, Multi-Asset Division
The summer has brought more clarity on the specifics of trade and fiscal policy under President Donald Trump. Now investors must weigh the implications for inflation, the economy, and monetary policy.
Delays and rollbacks to the extreme “reciprocal tariffs” unveiled at the start of April—as well as trade agreements with key partners—have helped to anchor market expectations for the effective U.S. tariff rate. But the potential for tariffs targeting certain industries is a source of uncertainty.
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. Higher import duties and shifting supply chains should result in higher costs for companies, some of which will be passed through to customers via price increases.
What could this mean for the economy and markets? Inflation could accelerate, consumer spending could fall, and corporate profit margins could be squeezed. Small businesses, which account for more than 70% of U.S. employment, tend to have less pricing power and more sensitivity to the economy and interest rates. As such, they may face more pressure to lay off employees.
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On the other hand, the tax and spending legislation that Congress passed in July should be modestly stimulative over the next few years. Here, the question is the extent to which more favorable tax treatment of capital expenditures and research and development will spur business investment. That said, stepped‑up spending on plants and equipment could lead to inflation in input costs.
The Federal Reserve must tread carefully as it walks the tightrope between keeping inflation in check with higher interest rates while being mindful of economic growth. Policymakers must also contend with political pressure to lower rates.
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 table highlights some of the key policy areas we’re watching and the possible implications for asset allocation.
Policy considerations and investment playbook
| What we’re watching | Potential implications | |
|---|---|---|
| Tariffs |
|
- 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.
+ 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.
+ Equities linked to real assets, such as energy and metals, historically have acted as a hedge versus inflation. Near-term economic weakness would be a concern for oil and industrial metals.
+ ln fixed income, we prefer shorter-duration assets and short-term Treasury inflation protected securities (TIPS). |
| Tax and fiscal policy |
|
- 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. value stocks could benefit from expansionary fiscal policy. However, slowing economic growth would be a headwind.
+ In fixed income, we prefer shorter-duration assets and short-term TIPS. |
| Immigration |
|
- 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‑duration assets.
+ Equities linked to real assets, such as energy and metals, historically have acted as a hedge versus inflation. Still, near-term economic weakness is a concern for oil and industrial metals.
+ In fixed income, we prefer shorter-duration assets and short-term TIPS. |
1Duration measures a bond’s sensitivity to changes in interest rates.
Policy considerations and investment playbook (cont.)
| What we’re watching | Potential implications | |
|---|---|---|
| Deregulation |
|
+ 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.2 |
| Energy |
|
+ A more supportive regulatory environment could help the oil and gas industry at the margin. However, significant growth in domestic hydrocarbon production could be a challenge because of industry consolidation and a maturing resource base. Economic weakness would be a headwind.
- Companies in the electric vehicle supply chain could encounter demand headwinds. |
| Health care |
|
- 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. |
2Gil Fortgang, an associate analyst who covers Washington and regulatory policy for T. Rowe Price Investment Management, explored this topic at length in “How the U.S. Election Could Impact the Financials Sector.”
Risks
Fixed‑income securities are subject to credit risk, liquidity risk, call risk, and interest‑rate risk. As interest rates rise, bond prices generally fall. Small‑cap stocks have generally been more volatile in price than the large‑cap stocks. Because of the cyclical nature of natural resource companies, their stock prices and rates of earnings growth may follow an irregular path. While U.S. government‑backed securities generally are considered to be among the highest credit quality, they are subject to market risk. The primary source of risk is the possibility of rising interest rates, which generally cause bond prices to fall. In periods of no or low inflation, other types of bonds, such as US Treasury bonds, may perform better than Treasury Inflation‑Protected Securities. Financial services companies may be hurt when interest rates rise sharply and may be vulnerable to rapidly rising inflation. International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets. The value approach to investing carries the risk that the market will not recognize a security’s intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. Health sciences firms are often dependent on government funding and regulation and are vulnerable to product liability lawsuits and competition from low‑cost generic product. All charts and tables are shown for illustrative purposes only.
*On April 28, 2025, T. Rowe Price was named as one of the best financial advisory firms of 2025. The ranking of the best registered investment advisory firms (RIA Firms) was determined using a methodology that considered recommendations by clients, industry experts, and financial advisors, as well as the development of Assets under Management (AUM). Recommendations were gathered through an independent survey of over 30,000 individuals, with self-recommendations prohibited. AUM development was analyzed using publicly available data, with short-term development assessed over a 12-month period from January 2024 to January 2025, and long-term development over a five-year period from 2020 to 2025. The final score was calculated by weighting recommendations at 20% and AUM development at 80%, with a 30/70 ratio for short-term and long-term AUM growth. The data used for the analysis was collected up to January 2025. The award was presented by USA Today and Statista Inc., a leading statistics portal and industry ranking provider that tabulated the rating. T. Rowe Price is not affiliated with USA Today or Statista. T. Rowe Price provided no compensation either directly or indirectly in connection with obtaining or using this rating.
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