Stock market under the Trump administration

President Donald Trump’s first year agenda promoted domestic manufacturing while extending key tax cuts from the 2017 Tax Cuts and Jobs Act. That pivot quickly raised new questions about the market’s direction, especially as trade announcements arrived in rapid succession. The administration announced numerous tariffs on April 2, and the S&P 500 dropped nearly 20% in seven weeks before the tone began to change.

Markets rebound and participation broadens

The market’s rebound has been striking. After hitting its lowest point in April 2025, the S&P 500 surged nearly 40% and remains near all-time highs,¹ underscoring how quickly sentiment can reset when investors see a new path. This market pattern resembles Donald Trump’s first term, when stocks also climbed early in the administration. Since Inauguration Day in January 2025, the S&P 500 Index gained more than 15% through January 8, compared to a 21% gain over the same period in 2017. ¹

Investors also broadened their risk appetite beyond the largest stocks. Smaller company stocks rose 13% in the current period and 15% in 2017, reinforcing that the rally has not been confined to a narrow set of names. ¹ Breadth matters because it often signals that investors see supportive conditions for a sustained earnings expansion across more of the economy.

Trade policy: Investors adjust faster than expected

The administration continues to shape the economy through evolving trade policies, By pausing many initial tariffs, the administration eased investor fears and created time for ongoing negotiations. Even with higher tariffs than entering 2025, investors and businesses have adapted to a new global trade environment rather than freezing activity. That adaptability has helped markets look through uncertainty and focus on what policy changes mean for growth, margins, and inflation.

“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, October, and December boosted investor optimism, while third quarter corporate earnings  reflected continued strength.”

Inside the tariff strategy: From broad moves to bilateral deals

Early last year, Donald 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), then paused most tariffs after the early April market decline and shifted toward bilateral negotiations. During the summer, the administration secured trade deals with the European Union and Japan that resulted in a 15% tariff rate, while other partners remained unresolved. Most trade with Canada and Mexico falls under the U.S. Mexico Canada Trade Agreement, with non-compliant goods subject to 25% tariffs.

Recent actions have kept trade in the spotlight. The administration announced additional tariffs on imported lumber and furniture, and U.S.–China tensions fueled volatility before both countries reached a one-year agreement on November 1 following a meeting between Donald Trump and Xi Jinping in South Korea. Under the agreement, the U.S. reduced fentanyl-related tariffs and suspended other restrictions for one year, while China agreed to resume regular U.S. soybean purchases and pause rare earth export controls. As written, that framework stabilizes trade relations well into 2026—at least temporarily—giving investors a clearer runway for expectations.

What effective tariff rate signals

The average effective tariff rate now approaches 12% and may rise as companies exhaust pre-tariff inventories and negotiated rates take effect. Many analysts expect the effective rate to settle in the mid-teens, and the Yale Budget Lab forecasts a 14.4% effective rate after accounting for consumers shifting away from more expensive imported goods. ²For markets, the effective rate matters because it influences pricing power, input costs, and the durability of corporate margins.

“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.

Legal risk: Wildcard for trade policy

Tariff policy also faces legal challenges that could alter the path from here. The U.S. Court of Appeals determined the President’s IEEPA use was illegal, and the administration appealed to the Supreme Court. The Court heard oral arguments on November 5 and may issue a final ruling in coming days, which could force more policy through Congress if the administration wants greater durability. While legislation could reduce legal vulnerability, markets also recognize that the legislative process takes time and outcomes remain uncertain given narrow Republican majorities.

“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.

Tax policy: Tailwind with a deficit debate

Rising tariff revenues may partially offset growing deficits linked to the administration’s major legislative initiative. In July, the President signed the One Big Beautiful Bill Act (OBBBA) into law, extending the 2017 tax cuts while introducing new tax considerations and initiating spending reductions, particularly related to Medicaid. The Congressional Budget Office projects the legislation will expand federal debt by $3.4 trillion over the next decade, even as tax cuts boost corporate earnings by $100 billion in 2025 and raise consumer after-tax incomes by $127 billion in 2026. ³ Earnings releases and executive commentary have highlighted how the law can boost profitability through tax savings, and capital expenditure plans rebounded alongside higher earnings growth expectations.

Inflation and the Fed: Cooling data, ongoing crosscurrents

Some economists argue tariffs could create recurring inflation, yet recent anecdotes and economic data point to more modest pressures so far. The Federal Reserve's (Fed) Beige Book reports widespread tariff-induced input cost increases across manufacturing and retail, though the degree of pass-through to final prices varies. ⁴ Over the past year, core CPI rose 2.6% in November, easing from August’s 3.1% annual pace but remaining above the Fed’s 2% target. ⁵ From an investor standpoint, that combination—cooling but still elevated—keeps the inflation narrative “alive,” even as rate expectations shift.

The Fed reduced its policy rate by 0.75% over the final three meetings of 2025 and emphasized two-sided risks to inflation and employment. Investors expect two more cuts this year, ⁶ and Fed Chair Jerome Powell signaled openness to future reductions while highlighting labor market weakness and suggesting tariff-related price pressures on core goods should peak in the first quarter. 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

Bonds and jobs: Why both are down

Despite persistent inflation, weaker labor markets have strengthened investors’ expectations for rate cuts, pushing longer-term yields lower. The U.S. economy added 64,000 jobs in December, yet monthly hiring slowed materially, averaging 17,000 from May through December versus 123,000 from January through April. ⁵ After reaching nearly 4.8% in January 2025, 10-year Treasury yields have hovered closer to 4.0%. ⁸ This is where macro data meets portfolio reality: lower yields can ease borrowing costs, but they can also reflect a market that is pricing in slower growth.

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.”

2026 watchlist: Government shutdown risk and geopolitics

Investors are also monitoring Washington’s budget calendar. Lawmakers provided full fiscal-year funding for some programs through September 30, but funded other government agencies only through January 30, raising the risk of a partial government shutdown starting January 31.

Consumers also face pressure from expiring Affordable Care Act health insurance subsidies, although the budget deal funds some sensitive programs that account for about 10% of the government budget. For markets, these issues matter less as “events” and more as confidence signals that can influence spending and risk appetite.

Geopolitical conflict continues to influence headlines as well. The U.S. military conducted a large-scale strike against Venezuela, capturing Nicolas Maduro and his wife and bringing them to the U.S. to face criminal charges for narco-terrorism conspiracy. Despite the dramatic development, markets opened with little disruption, and oil prices remained subdued amid the prospect of expanded production and a well-supplied global market. In periods like this, investors often reward resilience: they react to shocks, but they re-anchor quickly when fundamentals remain steady.

What this means for investors

Despite uncertainty around tariff policy, shutdown risk, and geopolitical tensions, investors continue to focus on constructive fundamentals—especially consumer spending and corporate earnings growth. That foundation helps explain why markets have pushed toward highs even as policy details remain in flux. An investment strategy aligned with risk tolerance and liquidity needs—supported by a financial plan—can help investors pursue long-term goals without letting short-term volatility dictate decisions.

If you have questions about the economy, markets, or your financial plan, your U.S. Bank Wealth Management team is here to help.