The first two weeks of the Trump 2.0 presidency have been a foretaste of what the full four years of his term are likely to be. The shock-and-awe approach in terms of the number of executive orders, rapid oscillations between momentous decisions and their quick reversal, and never-before-seen actions from his aides are likely to continue. In this environment, investors and citizens are left to wonder what will happen next. 

Before we get into the specifics we know and the questions to be answered, let’s paint the backdrop in which this is all occurring. The U.S. economy continues to show remarkable strength. Real gross domestic product was 2.8% for 2024. Unemployment is low, and initial jobless claims indicate it will likely remain so. Manufacturing is emerging from a more than two-year period of contraction. Inflation has blipped higher in recent weeks but is projected to resume a lower trend. The Federal Reserve still intends to cut interest rates this year. Business optimism is high. There is much to be grateful for in the U.S. economy. 

As a result of that economic strength, corporate profits are growing. At the halfway mark of the fourth quarter 2024 earnings report season, results are beating expectations. Earnings are more than 10% higher than a year ago. Perhaps most importantly, earnings growth is coming from almost all sectors, notably financial, industrial, and healthcare stocks. This is a welcome change from 2023 and most of 2024, when only megacap tech stocks grew earnings. Breadth of earnings growth is supporting a broadening of the equity rally. This, in turn, can keep the current bull market running.  

The combination of strong economic growth and better-than-expected earnings is a powerful elixir for the financial markets. We believe it will be sufficient to overcome the high degree of uncertainty emanating from Washington, D.C. The policy areas to which we refer include trade policy (tariffs), tax changes, regulatory stance, and immigration. We highlight each of these areas below and note the unorthodox governing approach in the early phase of President Trump’s second term. 

Immigration – Modest Certainty 

Starting with the policy area that has the most clarity, the new administration is rapidly rounding up undocumented immigrants, purportedly those with criminal records, and deporting them. The intent and action are clear. What remains to be seen is how far this will go. Will peaceful immigrants who have lived for years in the U.S. be caught up in the deportations? The implications for the economy are significant. While removing criminals from society will have negligible effect, the U.S. has just exited a tight labor market, one that contributed to the highest inflation in decades. If too many immigrants are deported and too few are allowed to enter the country legally, there will be labor shortages. This could create wage pressure, inflation, and ultimately higher interest rates, none of which will be good economically or for investments. Our base case is that the deportations will not go that far for logistical reasons alone. Still, we will be listening to corporate leaders for indications of impending labor shortages and wage pressures. 

Trade Policy – Low Certainty 

Economists and financial markets have been waiting for clarity on trade policy. We almost had clarity over the weekend, as 25% tariffs were announced on Canada and Mexico, with 10% tariff increases on China. However, on Monday, the tariffs on Canada and Mexico were delayed for one month. Questions abound. Will the tariffs actually go into effect? What is their intent? Are they to be permanent? The administration speaks of tariffs replacing income tax, but there are no details to such a plan, and the math required to make that work is difficult. Most likely, tariffs are both a bargaining chip to coerce desired behavior (border control, counter-narcotics) and a way to set the tone. President Trump espouses a strike-first-and-speak-loudly modus operandi. In this context, we should expect uncertainty to continue along with rapidly changing policy. While this may result in undesirable business uncertainty, the strength of the economy and profit growth may enable the markets to power through.  

Tax Policy – Low Certainty 

There are several heavy lifts facing President Trump and Congress when it comes to fiscal policy. The country is operating under a continuing resolution, and a fiscal year budget will need to be enacted. The debt ceiling currently prevents Treasury from issuing debt. The country is operating in a high debt/deficit regime. Finally, the expiration of the 2017 Tax Cuts and Jobs Act looms at year end. Any one of these items is likely to cause partisan fighting and negative media. Four at once requires a level of negotiation bordering on super-heroic. The battle lines are not fully drawn at present in terms of what both sides want. Lower taxes? Deficit reduction? One “big, beautiful bill” or legislation broken up into pieces? As President Trump’s cabinet gets fully confirmed, expect more of the potential outcome to come into focus. For now, there is little clarity on how these matters get resolved. 

Regulatory Environment – Modest Certainty 

With several of President Trump’s cabinet members still to be confirmed, it is hard to predict specific regulatory actions. However, it is clear that the emphasis will be on reducing regulatory burdens. Treasury Secretary Bessent’s order this week for the Consumer Financial Protection Board (CFPB) to stop all rule-making and suspend all litigation is a clear example of the intent. The direction to cut ten pages of regulation for every new page is another. Other expected actions include lower capital requirements for banks and easier permitting for energy production. As the new rules are announced, they are likely to be economically stimulative and positive for corporate profits.   

New Washington D.C. – Low Certainty 

President Trump is wielding executive power in ways never before seen and wielding emergency authority creatively. The Department of Governmental Efficiency (DOGE) has been established outside of Congressional action and granted substantial powers. At the same time, entire agencies, such as the Department of Education and the aforementioned CFPB, are being targeted for elimination. Budgetary powers constitutionally ascribed to Congress are being overwritten by executive fiat. A sovereign wealth fund is to be created, a fantastic concept for a country with $36 trillion in outstanding debt. Perhaps this will include a cryptocurrency reserve, but details on that campaign tentpole remain unannounced. It appears that shock-and-awe is being combined with a flood-the-zone methodology, forcing the opposition to pick its battles. One common theme to all of this is reducing the size and cost of the federal government. While individual sectors and companies may be affected, the U.S. economy overall is likely to benefit from resources being directed from the public to the private sector. This may be the only dogmatic economic concept with which the administration agrees. 

President Trump learned much from his first term and during his “time on the beach” while President Biden was in office. He has surrounded himself with people who are loyal to his vision and are unlikely to dissent. He is used to legal, political, and media challenges. Accordingly, he has started his four years at a fast pace. It is worth noting that none of the topics listed above is characterized by “High Certainty.” The majority are “Low Certainty.” This is likely to be the atmosphere for the next four years. While financial markets hate uncertainty, economic and profit growth can offset that. So, until and unless those are affected, expect uncertainty to be the most certain measure. We at Cerity Partners have a battery of sharpened pencils. We will update you regularly as events unfold in Washington, D.C. 

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