Donald Trump has been re-elected as President of the United States, with the Republican Party also regaining control of the Senate. While the House of Representatives remains undecided, it is expected to lean Republican, potentially giving Trump a significant advantage in advancing his legislative agenda with minimal opposition. This control could facilitate the implementation of reforms Trump has championed, including tax reductions and deregulation.
Markets reacted positively to the election results, mirroring trends observed in 2016. The S&P 500 experienced an uptick, with smaller domestic companies outperforming the index. Trump’s pro-business policies, including a proposal to lower corporate taxes from 21% to 15% and reduce regulations, have been well-received by investors. These measures are viewed as supportive of US economic growth, with the potential for equity markets to continue expanding beyond the technology sector.
On fiscal policy, Trump plans to extend the 2017 tax cuts, further widening the federal deficit. With no significant spending reductions outlined to offset these cuts, US government debt is projected to increase. This fiscal expansion could lead to higher government borrowing costs, posing challenges for bond markets. Although bond yields have risen significantly since 2022, they remain an essential component of diversified portfolios despite concerns over fiscal discipline.
Inflation is expected to be a significant factor in Trump’s second term. Expansionary fiscal policies, coupled with labour market constraints and anti-immigration measures, are likely to increase inflationary pressures. Additionally, tariffs on imports could further elevate costs for consumers. Rising inflation may force the Federal Reserve to reconsider its current monetary policy trajectory, potentially reversing recent rate cuts to stabilise the economy. This could result in higher borrowing costs for businesses and households, possibly slowing economic growth.
The US dollar has already strengthened against other currencies, buoyed by the likelihood of higher interest rates relative to global peers. This trend is expected to continue if inflationary pressures lead to sustained rate hikes by the Federal Reserve.
Markets often respond positively to the certainty provided by a clear election outcome, regardless of the winner. With Trump’s re-election, investors anticipate a continuation of pro-market policies, contributing to optimism in the short term. The real test, however, will be in how effectively these policies translate into long-term economic growth and stability. While markets react to immediate developments, the broader macroeconomic environment remains the critical factor shaping future trends.
Trump’s re-election signals a continuation of policies aimed at economic expansion, though challenges such as fiscal deficits and inflation loom large. Investors will be watching closely to see how these dynamics evolve and what they mean for the US economy and global markets in the years ahead.
Arbuthnot Banking Group PLC (LON:ARBB), trading as Arbuthnot Latham, provides private and commercial banking products and services in the United Kingdom. Founded in 1833, Arbuthnot Banking is based in London, United Kingdom.
