How investors can prepare for Trump’s first 100 days

The 2024 general election has marked a significant turning point in U.S. politics, with President-elect Donald Trump victorious in both the electoral college and the popular vote. With GOP control of the White House, Senate and House of Representatives, pivotal policy shifts may create new market leaders and laggards.

Here’s what investors should know about the potential implications for the economy and equity markets:

The Trump administration has the capacity to act unilaterally on several fronts, including tariffs, immigration and deregulation. However, more substantial changes, such as deeper tax cuts and significant budget adjustments, will require congressional approval.

The economic impact of potential policy shifts depends on their magnitude, scope, as well as their timing and sequence. For example, the Trump administration’s potential introduction of a 60% tariff on Chinese imports and a 10% to 20% universal tariff could increase U.S. inflation and decrease gross domestic product (GDP) growth to varying degrees¹.

Legal challenges could lead to more modest economic shifts. Alternately, if tariffs are steeper than expected and coincide with sweeping immigration reforms and deportation measures, there could be additional drags on growth. Downside risks could also arise if potentially disruptive policies, such as tariffs and immigration curbs, are enacted before pro-growth policies, like tax cuts and deregulation.

Additionally, investors may want to watch the proposed extension or expansion of the 2017 tax cuts, given their potential to further increase the sizable U.S. debt and deficit. High government debt and interest costs may ultimately crowd out other spending and become a drag on growth.

While markets have responded positively to the Republican sweep, scenarios ranging from slower-than-expected deregulation to shallower tax cuts could lead to underwhelming policy implementations, potentially disappointing markets and creating a split between potential sector beneficiaries and laggards.

In particular, Morgan Stanley’s Global Investment Office believes investors should keep an eye on the following areas:

1. Energy

The energy sector may face a divided future. Trump’s support for traditional energy through deregulation could boost the industry, yet the outlook for oil remains uncertain due to potential oversupply and weakening global demand, particularly from China.

Conversely, natural gas could see a more positive trajectory, driven by strong demand from Europe and increased domestic usage for electrification and data centers, in part to power Artificial Intelligence (AI) technologies.

The clean energy industry, meanwhile, might experience challenges, as Trump has indicated a rollback of tax credits from President Biden’s Inflation Reduction Act of 2022, although a complete repeal seems unlikely given the related investment has benefited Republican states and districts.

2. Defense

U.S. defense spending is expected to remain strong amid rising geopolitical tensions. That said, European defense stocks have outperformed U.S. counterparts, fueled by uncertainties about future U.S. involvement in the North Atlantic Treaty Organization (NATO) and increased defense spending by other NATO members in response to the Russia-Ukraine conflict.

Technological advancements are also creating a split within the defense sector, with increased investments in cybersecurity, AI, drones and other advanced technologies potentially benefiting smaller, specialized companies over traditional defense giants.

3. Technology and communications

The technology sector could see varying fortunes, with cryptocurrencies and AI-related industries likely benefiting from a favorable stance by the Trump administration.

In addition, long-term investments in reshoring semiconductors through the CHIPS and Science Act of 2022 could further insulate those areas and signal that AI policy has become a national security priority among lawmakers on both sides of the aisle. On the other hand, social media and information-related companies might continue facing regulatory and antitrust challenges.

As Trump prepares to take office, the interplay between his administration’s policy proposals and their economic impacts will be crucial in shaping the economy and markets. While the potential for growth and innovation exists, particularly in sectors like technology and natural gas, the overall economic outlook may be tempered by concerns about:

• Trade tariffs
• Immigration policies
• Tax cuts and spending
• The scope and timing of potential policy shifts like deregulation.

Trump’s policy agenda is likely to create new potential leaders and laggards in key sectors of the U.S. stock market. For example:

• Potential energy-industry deregulation may benefit natural gas companies more than oil producers, while clean-energy firms may struggle.
• Government-backed investment in cybersecurity, AI, drones and other advanced technology may favor smaller, specialized firms over traditional defense giants.
• The tech sector could benefit from pro-AI and cryptocurrency policies under Trump, though social media companies might face increased regulatory scrutiny.

Investors and policymakers alike will need to navigate these complexities carefully.

When considering which of these investments may fit into your portfolio, be sure to keep in mind individual goals, timelines, and risk tolerance.

For a weekly recap of the markets and thoughts on the week ahead, visit our weekly Market Dashboard.

Article Footnote and Source

¹ This article by Monica Guerra, Head of Policy, Morgan Stanley Wealth Management, and Daniel Kohen, U.S. Policy Strategist, Morgan Stanley Wealth Management was originally published on December 2, 2024 as “How Investors Can Prepare for Trump’s First 100 Days”. It is based on their Morgan Stanley Global Investment Office US Policy Pulse report “It’s a Red, Red, Red World’.

CRC# 4060585 12/2024