Wall Street shrugs off political drama, readies for Trump 2.0
Washington, D.C., faces a minefield of deadlines with serious political and economic implications as it enters 2025.
But Wall Street doesn’t seem too worried.
The stock market closed out 2024 with serious gains across sectors despite a slight December skid, and experts see plenty of green ahead despite high potential for political turmoil.
The S&P 500 index ended the year up more than 23 percent, winning its second consecutive annual gain of more than 20 percent. The Nasdaq composite closed roughly 29 percent higher, while the Dow Jones Industrial Average ended 2024 up about 13 percent.
While a sluggish December took some of the wind out of the market’s sails, Wall Street is still expecting stocks to power through stormier political waters.
“We are looking at record earnings and profit margins in 2025, along with household balance sheets in exceptional shape. There is very little worry about a recession,” Ryan Detrick, chief market strategist at Carson Group, said in a Tuesday email.
Detrick noted that part of the December sell-off was in response to the Federal Reserve projecting fewer rate cuts in 2025 in response to strong economic data.
He added that rising workforce productivity should help power the economy through a wide range of political flashpoints in 2025.
“We wouldn’t worry too much about the drama out of Washington,” Detrick said.
President-elect Trump will be counting on the stock market’s resilience throughout the start of his second term.
A suspension of the U.S. debt limit expires Thursday, setting off a countdown for Trump and the GOP-controlled House and Senate to avert a default. While the president-elect has called for getting rid of the debt limit, he is expected to face a serious challenge in even suspending it from fiscal hawks in his party.
Funding for the federal government will also expire on March 15, raising the threat of a government shutdown less than 100 days into Trump’s first term.
Detrick said Wall Street is used to waiving off shutdown battles and even full lapses in government funding, which have become increasingly common over the past decade. He added that the longest shutdown on record occurred in 2018 and stocks rose 10 percent.
“A potential government shutdown is likely at some point in 2025, but again, we’ve seen many shutdowns over the years and the longer-term impact is quite small to the economy,” Detrick said.
Republican lawmakers are also unlikely to let Trump take the fall for a catastrophic default on the national debt despite their misgivings about rising federal deficits.
Instead, the biggest market-related risk a shutdown or debt limit showdown could pose is derailing the GOP’s plans to cut taxes and regulations.
Trump and Republican lawmakers are eager to extend key provisions of the 2017 Tax Cuts and Jobs Act set to expire at the end of 2025, including cuts to individual income tax rates. The president-elect has also proposed cutting the corporate tax rate even further, which would give a jolt to markets in any circumstance.
The president-elect and his advisers are also crafting ways to peel back Biden administration regulations reviled by businesses, which could be another boost to markets in 2025.
“The potential upside from a business-friendly regulatory backdrop is clear. We believe markets are correct to expect deregulation to support certain industries, including financial services and oil and gas, and to help foster more merger and acquisition activity. Elon Musk’s and Vice President-elect J.D. Vance’s ties to Silicon Valley may lead to lighter-touch regulation in the technology sector,” analysts with LPL Financial wrote in a Monday research note.
Even so, the LPL analysts warned that the Trump agenda also includes several provisions that could sap enthusiasm driven by tax cuts and deregulation.
Trump has promised to impose new steep tariffs on imports from Canada, Mexico and China upon taking office in January. Those new levies, which he could impose without Congress, could boost costs for Americans and draw retaliatory tariffs from trade partners.
Economists have also expressed grave concern about the potential impact of Trump’s promised mass deportations of immigrants lacking permanent legal status.
“Protectionist trade policy put the ‘Great’ in the Great Depression. Higher import costs hurt profit margins for importers and retaliation can impair growth,” the analysts wrote. “Bottom line, for stocks to enjoy a good year in 2025, policy from the Trump administration will have to deliver more benefits than costs.”
Trump maintains that mainstream economists and analysts do not understand the true nature of tariffs or the broader economic goals they can accomplish when imposed.
“It’s going to have a massive effect — positive effect. It’s going to be a positive effect,” Trump said in October.