Stock market under the Trump administration

President Donald Trump won re-election in November 2024 and has shifted away from President Biden’s policies, prioritizing domestic manufacturing and extending key tax cuts from the 2017 Tax Cuts and Jobs Act. These new priorities prompted investors to question the stock market’s future direction. Post inauguration, President Trump announced and implemented numerous tariffs, causing the benchmark S&P 500 to drop nearly 20% in just seven weeks. However, the market rebounded strongly; after reaching its lowest point of 2025 on April 7, the S&P 500 has surged more than 35% and remains near all-time highs. ¹

Since President Donald Trump’s second term began, the S&P 500 Index has climbed over 12%, matching the pace set at the beginning of his first term.¹

Tariff policies draw the most attention

The Trump administration continues to shape the economy through evolving trade policies. They paused many initial tariffs, easing investor fears and allowing the administration time for trade negotiations, which continue today for many countries. Today, even with much higher tariffs than earlier this year, investors and businesses are actively adapting to the new global trade environment. However, labor markets and Fed rate cuts are also now on investors’ consideration list.

“Since April investors have overcome concerns that tariffs would negatively impact economic growth, earnings, and inflation,” says Bill Merz, head of capital markets research for U.S. Bank Asset Management Group. “Second-quarter corporate earnings growth, July’s tax-cut legislation, and September’s Fed rate cut boosted investor optimism.”

Evolving Tariff Strategies Under the Trump Administration

On April 2^nd, President Trump announced reciprocal tariffs against most every country citing authority under the International Emergency Economic Powers Act (IEEPA). The President paused most of these tariffs in the wake of the early April market decline, shifting to trade negotiations. Also early in the year, the President enacted sectoral tariffs, targeting specific goods or industries, using his authority under the Trade Expansion Act of 1962 and the U.S. Trade Act of 1974. The administration sought and reached basic agreements with some countries, but it has not secured a tariff deal or trade framework with many trading partners, including China whose 3-month tariff extension expires November 10.

During the summer President Trump secured trade deals with the European Union and Japan. The U.S. imposed 15% tariff rates on most goods, while both trade partners agreed to reduce or eliminate tariffs on most U.S. exports. Additionally, the agreement requires Japan to invest $550 billion into U.S. strategic sectors as the U.S. government directs.  President Trump recently announced another round of sectoral tariffs, effective October 14th. These new tariffs target lumber and timber at 10%, upholstered furniture at 25% (with a scheduled increase to 30% on January 1), and kitchen cabinets and vanities at 25% (rising to 50% on January 1^st). Existing trade deals with Japan and the European Union take precedence over these sectoral tariffs.

The U.S. Court of Appeals determined the President’s IEEPA use was illegal, but the Administration appealed to the Supreme Court, which should issue a final verdict in the coming months. Under a more traditional approach, Congress could approve formal trade agreements, replacing President Trump’s negotiated tariff deals with legislation less vulnerable to legal challenges. However, the legislative process takes significant time and has an uncertain outcome, given Republicans’ narrow House and Senate majorities. Sectoral tariffs take the Administration longer to implement but remain unchallenged in court.

Awaiting more definitive tariff news

The average effective tariff rate now stands near 11% and is likely to rise as companies exhaust pre-tariff inventories and new negotiated rates take effect. We calculate this rate by dividing monthly tariff revenue by imported goods’ values. Japan and the European Union recently agreed to a 15% tariff rate on most of their goods entering the U.S. Most countries and industries now face tariffs ranging from 10% to 20%, with some rates even higher. Many analysts expect effective tariffs to settle in the mid-teens; the Yale Budget Lab forecasts a 16.7% effective rate after accounting for consumers shifting away from more expensive foreign products toward domestic replacements. ²

As tariff plans remain in flux, companies seek greater clarity. “A 25% tariff burden is significantly more difficult for firms to navigate than spreading out an 11% tariff burden between suppliers and customers,” says Tom Hainlin, national investment strategist with U.S. Bank Asset Management Group. Walmart’s second quarter earnings report highlights this challenge. During their earnings teleconference, CEO C. Douglas McMillon explained, “With regard to our U.S. pricing decisions, given tariff related cost pressures, we're doing what we said we would do. We're keeping our prices as low as we can for as long as we can.” However, he admitted they “see more adjustments in middle- and lower-income households than we do with higher income households,” in response to higher prices. ³

The final tariff impact on the economy and corporate earnings remains unclear but investors continue to pay close attention. “The markets have acted rationally in trying to price tariffs’ impact on corporate earnings growth,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group.

Increasing tariff revenues may partially reduce the growing federal budget deficits resulting from the President’s major legislative initiative. In July, the President signed the One Big Beautiful Bill Act (OBBBA) into law, extending the 2017 Tax Cuts and Jobs Act’s tax cuts. The OBBBA also introduced new tax considerations and initiated several spending reductions, particularly related to the Medicaid program. The Congressional Budget Office projects that this legislation will expand the federal debt by $3.4 trillion, with tax cuts boosting corporate earnings by $100 billion in 2025 and boosting consumer after-tax incomes by $127 billion in 2026. ⁴ Recent earnings releases and executive commentary highlight how the new law boosts corporate earnings for many companies through tax savings. Capital expenditure plans rebounded along with rising corporate earnings growth expectations. Forecasters anticipate an even larger boost to consumers in 2026 as tax filing dates approach. Lower taxes can act as a fiscal stimulus, supporting earning and spending behavior.

Will tariffs boost inflation?

Some economists warn tariffs could drive recurring inflation, while others argue that tariffs may only trigger a one-time price adjustment. Recent anecdotes and economic data already reveal modest inflationary signals. The Federal Reserve's (Fed's) Beige Book, which gathers insights from each of the Fed’s 12 regional banks, reports, “Most Districts reported that their firms were expecting price increases to continue in the months ahead, with three of those Districts noting that the pace of price increases was expected to rise further.” ⁵ Business “prices paid” surveys from the Federal Reserve and various trade groups show that prices fell in August and September, but remain higher than the beginning of the year. ⁶

In a September speech in Rhode Island, Fed Chair Jerome Powell noted that “Near term risks to inflation are tilted to the upside, and risks to employment to the downside” describing the situation as challenging. ⁷ In mid-September, the Fed reduced their policy rate by 0.25%, reiterating risks to both their inflation and employment mandates. Chair Powell explained, “to the consumer, the pass through [of tariffs] has been pretty small,” but companies intend to pass along more cost increases. Markets now expect one to two additional 0.25% cuts by the end of 2025 and an additional two to three cuts in 2026.⁸ President Trump remains critical of Powell, even suggesting firing the Fed chair before his term expires in May 2026. The President has backed off that threat but continues to criticize Powell and Fed interest rate policymakers. ⁹

Inflation concerns persist, as the latest Consumer Price Index (CPI) data shows headline inflation accelerated in August, approaching early 2025 levels. The August CPI release reported a 2.9% price increase over the past 12 months, above July’s 2.7% rate and close to January 2025’s 3.0% increase. ¹⁰ This inflation level remains well above the pre-pandemic decade average and exceeds the Fed’s 2% target.

Despite persistent inflation, weaker labor markets have led investors to expect one or two additional rate cuts by year end, causing longer-term interest rates to fall. After reaching nearly 4.8% in January 2025, 10-year Treasury yields are near 4.20% as of early October. ¹¹

“Longer-term bond yields fairly reflect Fed policy rate and inflation expectations and remain consistent with the outlook for nominal growth,” says Merz. “Bond yields appear poised to remain rangebound for now.”

Constructive economic fundamentals buoy investor sentiment

Despite ongoing tariff policy uncertainty, investors keep focusing on generally strong economic fundamentals, including healthy consumer spending and corporate earnings growth. Diverse income sources, a global perspective on asset classes, and an investment strategy aligned with risk and liquidity constraints sourced through a financial plan can help you achieve your most important financial goals.

Do you have questions about the economy, markets or your finances? Your U.S. Bank Wealth Management team is here to help.