Today is the first full day of the second Trump administration. Judging from early futures pricing overnight, investors either liked what they saw or were relieved that Executive Orders weren’t about to disrupt a growing economy. That, however, was later compromised by threats of tariffs against Mexico and Canada.
Rather than get too precise on my views at low altitude, I thought I would make some 30,000 foot observations. First, it was hard to ignore the energy of the day. I realize our constituencies watched with a range of emotions ranging from euphoria to despair. Depending on the glasses, rose colored or clouded, which affected one’s vision, it was hard not to feel the positive vibes of the day. As noted above, futures resonated with the same emotion, at least until the specter of tariffs was raised.
But I would also note that yesterday or today probably represents the point of maximum political capital in Trump’s second term. Consensus says that growth will accelerate, that inflation is headed lower, that all wars outstanding will be resolved quickly, perhaps in 90 days, that our borders will be sealed, and only legal immigrants will ever enter again. Federal workers, who still have jobs in a few months, will return to offices and be more productive. Our defense systems will be rebuilt to withstand all threats.
Some of this will happen. All of it won’t. And there is the rub. Like most of us, I want to be optimistic. And there are lots of reasons to be optimistic. DOGE is likely to work to some extent, maybe not to the full promises of Musk, but any movement in the right direction is a positive. Taxes will remain low. Not all the Trump promises will happen; he only spoke of tip wages being tax free yesterday, but whatever happens, taxes aren’t likely to rise. Trump could end the wars in Ukraine and Gaza, but China is likely the biggest threat and the confrontation is still ahead of us. Putin isn’t going away.
With all this said, stocks depend on earnings and interest rates. Inflation affects both. With everything said yesterday and likely throughout the rest of this week, the tracks of both inflation and economic growth are not going to be affected immediately. Importantly, we learned little so far about tariffs other than the obvious threats we have heard forever. They will be implemented but most likely strategically, not across the board.
Bottom line is that there is reason to be hopeful and nothing said yesterday reduces that optimism. But we are a democracy, not a dictatorship. A lot of the important stuff will require Congressional action and nothing said yesterday will make passage with ultra-thin margins any different or easier. No road in today’s political world is perfectly smooth. When one party has a majority of 2-3 votes in each chamber of Congress, getting unanimous approval is iffy. Thus, let’s celebrate today, but keep a sober eye on what happens tomorrow.
With that said, if inflation stays contained, the outlook remains for 10%+ earnings per share growth in 2025 with restrained inflation, and the path forward still seems higher, at least until a legislative roadblock appears. Tariffs are a threat but they have to fit in with the rest of his fiscal actions. Those are still sketchy and how Congress will react will almost certainly take longer than Trump supporters hope. Flat futures in the late evening suggest nothing we heard yesterday is going to lead to an abrupt change in investor psychology.
Today, Microsoft founder Paul Allen is 72. Jack Nicklaus turns 85.
James M. Meyer, CFA 610-260-2220