Stock market under the Trump administration

President Donald Trump’s agenda promotes domestic manufacturing while extending key tax cuts from the 2017 Tax Cuts and Jobs Act. This pivot led investors to question the stock market’s direction. After the inauguration, President Trump quickly announced and enacted numerous tariffs, causing the S&P 500 to drop nearly 20% in seven weeks. However, the market rebounded strongly; after hitting its lowest point in April 2025, the S&P 500 surged nearly 35% and remains near all-time highs. ¹

Stock prices during President Trump’s second administration have mirrored his first term. Since Inauguration Day in January, the S&P 500 Index climbed nearly 14% through December 2, compared to an 18% gain over the same period in 2017. Smaller company stock prices also increased during both periods, rising 10% and 15% respectively, highlighting broad market participation and growth. ¹

Investors look beyond tariffs

The Trump administration continues to shape the economy through evolving trade policies. By pausing many initial tariffs, it eased investor fears and created time for ongoing negotiations. Even with higher tariffs than earlier this year, investors and businesses have actively adapted to the new global trade environment.

“Since April, investors have overcome concerns that tariffs would negatively impact economic growth, earnings, and inflation,” says Bill Merz, head of capital markets research for U.S. Bank Asset Management Group. “July’s tax cut legislation and Fed interest rate cuts in September and October boosted investor optimism, while third quarter corporate earnings  reflect continued strength.”

Evolving tariff strategies

Early in the year, President Trump enacted sectoral tariffs targeting specific goods or industries under the Trade Expansion Act of 1962 and the U.S. Trade Act of 1974. On April 2, he announced reciprocal tariffs against most countries under the International Emergency Economic Powers Act (IEEPA) but paused most tariffs after the early April market decline, shifting to bilateral trade negotiations. During the summer, President Trump secured trade deals with the European Union and Japan, resulting in a 15% tariff rate. The administration has reached basic agreements with other trading partners but has not secured deals with others, including Canada and Mexico.

The administration recently announced additional tariffs on imported lumber and furniture, while escalating U.S.-China trade tensions spurred additional market volatility. On October 10, both countries imposed new sanctions, with China threatening to restrict rare earth exports while President Trump responded with a proposed 100% tariff rate and software export controls. The two countries eventually concluded a one-year trade agreement on November 1, after a meeting between President Trump and China’s President Xi Jinping in South Korea. The U.S. reduced Chinese fentanyl-related tariffs and suspended other trade restrictions for one year, while China will resume regular U.S. soybean purchases and pause rare earth export controls. The agreement stabilizes trade relations well into 2026.

Meanwhile, legal challenges could derail the administration’s tariff policies. The U.S. Court of Appeals determined the President’s IEEPA use was illegal, but the administration appealed to the Supreme Court. The Court heard oral arguments November 5 and will issue a final ruling in coming months. Congress could approve formal trade agreements, replacing President Trump’s negotiated tariff deals with legislation less vulnerable to legal challenges. However, the legislative process takes significant time and has an uncertain outcome, given Republicans’ narrow House and Senate majorities. Sectoral tariffs take longer to implement but remain unchallenged in court.

Awaiting more definitive tariff news

The average effective tariff rate now approaches 12% and will likely rise as companies exhaust pre-tariff inventories and new negotiated rates take effect. We calculate this rate by dividing monthly tariff revenue by imported goods’ values. Many analysts expect effective tariffs to settle in the mid-teens; the Yale Budget Lab forecasts a 14.4% effective rate after accounting for consumers shifting away from more expensive foreign products toward domestic replacements. ²

Companies continue to seek greater clarity as tariff plans remain in flux. “A 25% lumber tariff is significantly more difficult for firms to navigate than spreading out a 14% tariff burden between suppliers and customers,” says Tom Hainlin, national investment strategist with U.S. Bank Asset Management Group. The final tariff impact on the economy and corporate earnings remains unclear but investors continue to pay close attention. “The markets have acted rationally in trying to price tariffs’ impact on corporate earnings growth,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group.

Increasing tariff revenues may partially reduce the growing federal budget deficits resulting from the President’s major legislative initiative. In July, the President signed the One Big Beautiful Bill Act (OBBBA) into law, extending the 2017 Tax Cuts and Jobs Act’s tax cuts. The OBBBA also introduced new tax considerations and initiated several spending reductions, particularly related to the Medicaid program. The Congressional Budget Office projects that this legislation will expand the federal debt by $3.4 trillion over the next decade, with tax cuts boosting corporate earnings by $100 billion in 2025 and boosting consumer after-tax incomes by $127 billion in 2026. ³ Companies’ earnings releases and executive commentary highlight how the new law boosts corporate earnings for many companies through tax savings. Capital expenditure plans rebounded along with rising corporate earnings growth expectations. Forecasters anticipate an even larger boost to consumers in 2026 as tax filing dates approach.

Will tariffs increase inflation?

Some economists warn tariffs could drive recurring inflation, while others argue that tariffs may only trigger a one-time price adjustment. Recent anecdotes and economic data already reveal modest inflationary signals. The Federal Reserve's (Fed) Beige Book reports widespread tariff-induced input cost increases across manufacturing and retail businesses, though the extent costs pass through to final prices varies. ⁴ Meanwhile, business Prices Index from the Institute of Supply Management increased 0.5% in November, with much of the increase attributed to higher raw materials prices. ⁵

The Fed reduced its policy rate by 0.25% at both September and October meetings, reiterating two-sided risks to their inflation and employment mandates. Investors expect one more cut this year and two next year, ⁶ but Fed Chairman Jerome Powell noted a December rate cut is “far from” a foregone conclusion. During the October press conference, Powell said, “We think policy is still modestly restrictive,” suggesting room for additional rate cuts if labor market risks continue offsetting higher inflation concerns, or if inflation subsides. President Trump remains critical of Powell, even suggesting firing the Fed chair before his term expires in May 2026. The President has backed off that threat but continues to criticize Powell and Fed interest rate policymakers. ⁷

Meanwhile, inflation concerns persist. After a two-week delay due to the government shutdown, the Bureau of Labor Statistics reopened long enough to release the September Consumer Price Index (CPI). The index increased by 3.0% over the past 12 months, accelerating slightly from August’s 2.9% annual pace. ⁸ Inflation remains well above the pre-pandemic decade average and exceeds the Fed’s 2% target.

Despite persistent inflation, weaker labor markets have fueled investors’ rate cut expectations, causing longer-term interest rates to fall. The U.S. economy added 119,000 jobs in September, exceeding forecasts, but the Bureau of Labor Statistics revised previous monthly job gains significantly lower, indicating weaker hiring than previously believed. January through April monthly payroll growth averaged 123,000, slowing to just 39,000 in May through September. ⁸ The government shutdown delayed recent jobs reports with the November jobs data scheduled for December 16, a week after the Fed’s December meeting.

Meanwhile, after reaching nearly 4.8% in January 2025, 10-year Treasury yields are hovering near 4.0%. ⁹

“Longer-term bond yields fairly reflect Fed policy rate and inflation expectations and remain consistent with the outlook for nominal growth,” says Merz. “Lower bond yields act as a modest tailwind for consumer and corporate borrowers through cheaper funding costs for now.”

Constructive economic fundamentals buoy investor sentiment

Despite ongoing tariff policy uncertainty, investors keep focusing on generally strong economic fundamentals, including healthy consumer spending and corporate earnings growth. Diverse income sources, a global perspective on asset classes, and an investment strategy aligned with risk and liquidity constraints sourced through a financial plan can help you achieve your most important financial goals.

Do you have questions about the economy, markets or your finances? Your U.S. Bank Wealth Management team is here to help.