Trump's Victory: A Republican Wave Shaping the Economic and Geopolitical Future of the United States
Trump’s victory cements Republican control, enabling aggressive trade policies, tax cuts, deregulation, and stricter immigration measures. While markets may benefit short-term, risks include inflation, deficits, and geopolitical uncertainty. Europe shows resilient growth, but emerging markets face rising trade and currency challenges.
Trump’s Victory: A Republican Wave Shaping the Economic and Geopolitical Future of the United States
The victory of Trump’s camp is decisive. The Republican Party emerges stronger from these elections and is set to govern the country with full powers. With an advantage in the race for control of the House of Representatives, the Republicans are already assured of securing the White House and the Senate. They also maintain a majority in the Supreme Court. This Republican wave will enable the new president to implement his policies without the risk of institutional gridlock, granting him considerable latitude.
The key points of the Republican program focus on trade policy and immigration. Regarding trade policy, echoing his first term, the new president is determined to vigorously defend U.S. commercial interests. He has proposed taxing all imports by 20%—and up to 60% for goods from China. The administration’s bet is that foreign companies will establish production facilities in the U.S. to avoid these tariffs, thereby boosting investment and activity domestically. These tariffs are expected to generate revenue to finance a reduction in the corporate tax rate from 21% to 20% for companies that manufacture in the U.S.
Controlling immigration and expelling undocumented immigrants are also major campaign promises. However, implementing such measures seems challenging on both administrative and legislative fronts. With unemployment at very low levels, the expulsion of a significant number of immigrant workers risks straining production capacity and could even trigger a supply shock. The reduction of the workforce in sectors heavily dependent on immigrant labor, such as agriculture and construction, could restrict supply and negatively impact economic activity.
President Trump is also a strong proponent of deregulation. We can therefore expect a relaxation of rules in various sectors, particularly banking, with a loosening of capital requirements. Regulatory easing is also anticipated in technology and cryptocurrency sectors.
On the international stage, consistent with his first term, Trump approaches foreign policy in a transactional and bilateral manner. His positions may alarm U.S. allies. This aspect of his program introduces more uncertainties than certainties, particularly concerning Ukraine, the Middle East, and Taiwan.
Economic and Market Outlook
Tax cuts, deregulation, and investment incentives are all factors that support economic activity and are thus positive for the markets. The only downside: the trajectory of U.S. public deficits remains negative and could become even more concerning, as no fiscal consolidation is currently planned. The budget deficit is expected to remain at around 6-7% of GDP, depending on the timing of fiscal measures.
Additionally, the chosen economic policies pose an inflation risk, particularly due to tariffs and large-scale expulsions of immigrant workers. By 2025, however, disinflationary forces are expected to prevail, potentially confirming a path of interest rate cuts by the Federal Reserve.
The outlook remains broadly favorable for equity markets. Smaller companies, which had significantly lagged behind large-cap stocks, are expected to perform well in the U.S. We also remain positive on mega-cap stocks, particularly in the technology sector, which benefits from increased investment in artificial intelligence. In U.S. bond markets, the short end of the yield curve should remain anchored. However, an increase in the term premium on long-term rates is expected, reflecting public deficit trajectories and inflation uncertainties. We therefore favor carry strategies on short- to medium-term durations.
In Europe, economic growth is slowing, especially in the industrial sector. Furthermore, ongoing fiscal consolidation in some countries will necessarily weigh on growth. Households, however, are entering a more favorable phase in terms of purchasing power, with wage growth outpacing inflation. This rise in real wages should bolster consumer confidence and stimulate demand among Europe’s 440 million residents. Unusually, Southern European countries are now outperforming their Northern counterparts economically. They are benefiting from European recovery plans, better labor market dynamics, and robust activity in the services sector.
We maintain a constructive approach to European equities, based on weak but resilient growth and the prospect of stronger consumer spending. In the long term, as highlighted in the Draghi report on European competitiveness, eurozone countries must implement a coherent industrial policy, strengthen innovation, and reduce regulatory burdens to close the growth gap with the U.S. and China.
The disinflationary trend is more pronounced in Europe than in the U.S., enabling continued rate cuts at a steady pace. In the UK and Sweden, where households largely rely on variable-rate financing, the effect of rate cuts will be quicker than in other European countries.
Eurozone bond markets, and fixed-income assets more broadly, are to be favored during this phase of rate reductions. Inflation expectations remain well-anchored in the eurozone, and the recent rise in long-term rates, mirroring U.S. dollar rates, presents a short-term opportunity.
Emerging Markets and Global Trade Tensions
As we enter a phase of trade tensions, the situation for emerging markets becomes more concerning. While global trade continues to grow, there is increasing fragmentation, with the emergence of regional blocs. Trade remains significant within these blocs but is deteriorating on a global scale. Moreover, pressure on the U.S. dollar is likely to impact the financing of emerging economies, particularly those with current account deficits.
With a strengthened majority, the Trump administration is set to pursue a growth-oriented policy. This involves a mix of supply-side measures, such as corporate tax cuts and investment incentives, and a disruptive approach to immigration and tariffs. This will likely lead to short-term growth but also greater uncertainties in terms of financing, inflation, and geopolitics. Adapting to this environment calls for a constructive yet flexible asset allocation—opportunistic but diversified.
Published in Agefi Luxembourg and Paperjam.
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