Trump’s Second Term: Stock Market Position and Economic Implications of Proposed Policies

On January 20, 2025, as Donald Trump was sworn in for his second term, the New York Stock Exchange (NYSE) reflected cautious optimism. The NYSE Composite Index closed at 19,607.37, marking a modest 0.30% increase from the previous day. Similarly, the S&P 500 and Dow Jones Industrial Average posted slight gains, signaling investor anticipation of Trump’s economic policies. However, a comparison with previous years offers a more nuanced understanding of the market’s trajectory.

During Trump’s first term in 2017, markets saw remarkable growth, with the Dow Jones climbing 25% and the S&P 500 gaining nearly 20% by year-end. Tax cuts and deregulation were credited for boosting corporate earnings and investor confidence. In 2025, however, market enthusiasm is more tempered. Inflationary pressures, tight labor markets, and global uncertainty have created a less robust economic backdrop compared to the post-2016 surge.

Trump’s second-term policies aim to recreate earlier successes but carry notable risks. His proposed tariffs on imports—ranging from 10% to 20%—could function as a tax on businesses and consumers, increasing costs and eroding disposable income. From an economic perspective, tariffs create inefficiencies by driving up the price of imported goods and reducing overall consumer welfare. These policies may lead to lower consumption, a key driver of U.S. economic growth, and disrupt supply chains for industries dependent on foreign components.

Conversely, Trump’s pledge to extend the 2017 tax cuts is expected to provide some stimulus. Tax reductions increase disposable income and corporate profitability, theoretically encouraging investment and consumption. However, delays in implementing these measures could expose the economy to the adverse effects of tariffs before the benefits of tax relief materialize, potentially exacerbating market volatility.

The administration’s continued focus on deregulation aims to foster a more business-friendly environment. Lower regulatory burdens reduce operating costs and boost profitability, particularly in industries such as energy and financial services. However, the long-term sustainability of these measures depends on balancing short-term growth with risks to environmental and labor standards.

Using economic models like the IS-LM framework, the potential effects become clearer. Tariffs could shift the IS curve leftward by reducing aggregate demand through higher prices and weaker consumption. At the same time, tax cuts and deregulation could partially offset this shift by encouraging private investment and government spending. The net impact on GDP and employment will hinge on the interplay of these policies and their execution.

Compared to 2017, the market in 2025 is navigating a more complex landscape. Trump’s first term benefited from synchronized global recovery and accommodative monetary policy, while his second term faces tighter monetary conditions and heightened geopolitical risks. Rising interest rates further complicate the equation, as higher borrowing costs could undermine the positive effects of fiscal stimulus.

In conclusion, the stock market reflects cautious optimism, balancing the potential gains of tax reforms and deregulation against the risks of tariffs and inflation. While Trump’s policies aim to replicate earlier economic successes, their effectiveness will depend on timely implementation and a favourable global context. For investors, navigating this landscape requires careful consideration of both opportunities and challenges.