Trump 2.0 Flatter and Fatter Distribution Outcome

Donald Trump’s First Term Accomplishments versus Second Term Opportunities: Less Levers to Pull

Christopher Combs
Chief Capital Market Strategist
Silicon Valley Capital Partners

Donald Trump’s second term as President of the United States begins under markedly different economic conditions than his first. The economic backdrop of January 2017 offered distinct advantages compared to January 2025, and understanding these differences is critical to forecasting the potential economic outcomes of his second term. A critical concern for 2025 is that inflation expectations may be underestimated, potentially setting up the stock market for significant missed expectations and increased volatility.  In addition, the post-2022 stock market snapback recovery and the inflation moderation trade have largely run their course, leaving the S&P 500 valuation expensive by most metrics.

The following are important considerations for 2025 and Trumps entire second term:
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Stock Market Valuation: Price-to-Forward Earnings Multiples (2017 vs. 2025)

January 2017: A Moderately Valued Market

• P/E Multiple: The stock market’s price-to-12-month forward earnings multiple stood at 17.1 (source: FactSet).
• Drivers of Valuation:
  • Optimism surrounding President Trump’s pro-business policies, including expectations for corporate tax cuts and deregulation, supported market sentiment.
  • A backdrop of moderate economic growth and low inflation kept valuations stable.

January 2025: Elevated Valuations Amid Heightened Risks

• P/E Multiple: The forward P/E has risen significantly to 21.7 (source: Bloomberg Market Intelligence).
• Implications:
  • This elevated multiple reflects strong investor expectations for robust future earnings growth, supported by advancements in technology, AI, and productivity gains.
  • However, higher valuations leave the market with less room for multiple expansion and increased vulnerability to downside risks, particularly if inflation expectations or earnings growth falter.

Market Expansion Potential

• Historical Challenges with High P/E Multiples:
  • History supports that markets with P/E multiples above 20 face greater resistance to further gains.
  • Sustaining high valuations requires substantial and consistent earnings growth, leaving markets exposed to external shocks and policy missteps.
• Impact of Rising Inflation Expectations:
  • If inflation rises unexpectedly, the Federal Reserve may tighten monetary policy more aggressively, raising borrowing costs and suppressing corporate earnings.
  • This could lead to a valuation contraction, where P/E multiples compress as earnings growth fails to meet market expectations.

Historical Comparison

• Late 1990s Bubble:
  • The tech boom of the late 1990s saw P/E multiples exceed 25, but valuations collapsed during the dot-com bust when earnings growth disappointed, and markets faced external shocks.
• Mid-2020s Risks:
  • Like the 1990s, the elevated valuations of 2025 suggest heightened market vulnerability.
  • Underestimating inflation or overestimating earnings growth could trigger a market correction, as rising interest rates and tightening financial conditions weigh on investor confidence.

Conclusion

1. Elevated Vulnerability: A P/E multiple of 21.7 in 2025 signals a richly valued market, reliant on strong earnings growth to justify these valuations.
2. Inflation Risks: Unexpected increases in inflation could lead to tighter monetary policy, suppressing earnings and triggering a contraction in P/E multiples.
3. Historical Lessons: High-P/E environments are particularly sensitive to economic shocks and policy missteps, as demonstrated by corrections in the late 1990s and early 2000s.
4. Outlook: To sustain current valuations, economic conditions must align with market expectations, including moderate inflation, steady corporate profitability, and no significant policy errors. Failure in any of these areas could result in significant market volatility and corrections.

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S&P 500 Forward Earnings Growth Expectations: A 2017–2025 Comparison

January 2017:

• In early 2017, the S&P 500’s forward 12-month earnings growth was projected at approximately 11%, buoyed by optimism surrounding proposed tax reforms and deregulation initiatives. These measures were expected to boost corporate profitability by lowering tax burdens and reducing regulatory costs, according to Goldman Sachs Economic Research.

January 2025:

• As of 2025, forward earnings growth remains a bright spot, with S&P 500 full-year 2026 earnings projected at $309 per share, indicating a potential 10%+ annual growth rate. However, sustaining these expectations hinges on several key factors, including productivity gains, cost management, and stable macroeconomic conditions.
• Forward revisions for 2026 and 2027 will play a critical role, especially given the uncertainty surrounding inflation and its potential impact on corporate margins.

Key Considerations

1. Can Earnings Expectations Grow Amid Rising Inflation?
   • Earnings growth depends heavily on companies’ ability to enhance productivity and manage rising input costs.
   • If inflation is underestimated, companies may face higher-than-expected input costs, suppressing profit margins and failing to meet market expectations.
   • Industries sensitive to input costs, such as manufacturing, retail, and consumer goods, are particularly vulnerable.
2. The Role of Inflation in Profitability:
   • Rising inflation erodes profitability, especially in consumer-driven sectors where pricing power is limited.
   • Analysts at the Federal Reserve Bank of St. Louis caution that markets relying on underpriced inflation expectations risk being blindsided by the monetary tightening needed to control inflation.
   • This tightening could reduce economic activity, directly impacting corporate earnings and stock valuations.
3. Potential Impact of Missed Expectations:
   • An inflation surprise could create significant pressure on corporate margins, leading to earnings downgrades and increased stock market volatility.
   • Risk asset repricing may follow, with sectors heavily reliant on consumer spending or sensitive to borrowing costs being most affected.
4. Opportunities for Improved Growth:
   • Technology and AI-Driven Expansion: Growth in advanced technologies and artificial intelligence is a promising factor that could widen margins and sustain earnings growth into 2027.
   • Companies leveraging automation, data analytics, and AI innovations may experience productivity gains significant enough to offset rising costs.
   • These advancements could drive sustained sectoral growth in tech, healthcare, and logistics, providing a cushion against inflationary pressures.

Conclusion

While forward earnings growth for the S&P 500 remains strong, reaching $309 per share in 2026, the risks of rising inflation and macroeconomic missteps pose significant challenges. The rate of change in inflation expectations is a key variable, as underestimating inflation could suppress margins and trigger earnings downgrades. On the other hand, advancements in technology and AI offer opportunities for sustained productivity gains, potentially offsetting inflationary pressures and extending growth expectations into 2027. Success will ultimately depend on managing inflation effectively, maintaining monetary policy balance, and leveraging innovation to drive profitability.
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Federal Deficit and Debt Dynamics: 2017–2025

First Term (2017): Expansionary Fiscal Policy

• National Debt: Stood at $19.9 trillion, reflecting previous fiscal trends and the impact of the early Trump administration’s policies.
• Key Spending Programs:
  1. Tax Cuts and Jobs Act (2017):
     • Corporate tax rates reduced from 35% to 21%, boosting corporate earnings, encouraging investment, and supporting GDP growth.
     • The estimated cost: $1.5 trillion over ten years.
  2. Defense and Infrastructure:
     • Significant increases in defense spending and infrastructure investments added further stimulus.
  3. Combined spending programs provided an estimated $3.5–$4 trillion in fiscal stimulus, as reported by the Congressional Budget Office (CBO).
• Outcome: While the measures boosted economic activity, they widened annual deficits, contributing to a sharp increase in federal debt.

Second Term (2025): Fiscal Challenges Mount

• National Debt: Has risen dramatically to $36.2 trillion, reflecting sustained deficit spending and compounded interest costs (source: US Treasury Reports).
• Debt-to-GDP Ratio: Exceeds 120%, highlighting significant fiscal strain and reduced flexibility for new spending initiatives.
• Key Spending Programs
  1. 1. 1. First-Term Programs:
           • The Tax Cuts and Jobs Act spurred corporate investment and supported economic growth, but the lost revenue contributed to rising deficits.
           • Increased defense budgets enhanced military readiness and provided a short-term boost to GDP.
        2. Unspent Federal Programs (2025):
           • Funds from the CHIPS and Science Act and the Inflation Reduction Act remain available but are structured for long-term growth rather than immediate economic relief.
           • These programs focus on technological advancement, renewable energy, and domestic manufacturing, which are unlikely to address short-term inflationary pressures in 2025.
        3. Spending Constraints:
           • With limited fiscal headroom, policymakers face difficulty enacting additional stimulus without risking inflationary overheating.
           • Persistent deficits and rising interest rates increase the cost of servicing debt, crowding out potential investments in other areas.

  Implications of Rising Debt

  1. 1. 1. Inflationary Risks:
           • Continued deficit spending in a high-debt, high-inflation environment could exacerbate price pressures and destabilize markets.
           • Investors may demand higher yields on government bonds, increasing borrowing costs and pressuring federal budgets.
        2. Policy Inflexibility:
           • The high debt burden limits the government’s ability to respond to economic shocks with fiscal stimulus, leaving monetary policy as the primary tool.
        3. Market Instability:
           • Elevated debt levels and limited fiscal options could heighten market volatility, particularly if inflation surprises or global economic disruptions occur

  Conclusion

  The rapid increase in the national debt from $19.9 trillion in 2017 to $36.2 trillion in 2025 underscores the challenges of maintaining fiscal discipline amid expansionary policies. While first-term initiatives like the Tax Cuts and Jobs Act and defense spending supported economic growth, they also set the stage for mounting deficits. In 2025, fiscal policymakers face constrained options due to the high debt-to-GDP ratio and inflation risks, making additional stimulus measures unlikely without exacerbating existing vulnerabilities. Long-term programs such as the CHIPS and Science Act offer some growth potential but are insufficient for addressing immediate economic challenges.
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  Inflation Expectations, Tariffs, and Trade Policy Impacts

  Inflation Expectations: 2017 vs. 2025

  1. 1. • January 2017:
          • The US Consumer Forward 3-Year Inflation Expectations Survey registered at 2.9%, reflecting stability in a low-inflation environment (source: Federal Reserve Bank of New York).
          • Stable expectations were supported by moderate economic growth and controlled price increases.
        • January 2025:
          • Expectations have slightly declined to 2.6% (source: University of Michigan Surveys of Consumers), indicating subdued consumer confidence in sustained price growth.
          • These projections may underestimate inflation risks, particularly given recent tariff policies, global economic uncertainties, and structural supply-chain challenges.

  Tariff Impacts

  1. 1. 1. Increased Tariffs with China, Canada, and Mexico:
           • Inflationary Effects:
             • Higher tariffs on industrial goods, electronics, and agricultural products directly increase import costs, contributing to rising consumer prices.
             • Tariffs imposed during Trump’s first term raised average prices by 0.5% (source: Peterson Institute for International Economics). A broader application of tariffs in 2025 could exacerbate these pressures, pushing consumer price indices higher.
           • Corporate Profitability:
             • Rising input costs from tariffs could compress corporate margins, particularly for companies reliant on imported goods.
             • Sectors such as manufacturing, retail, and agriculture would likely bear the brunt of these inflationary effects, reducing market valuations and earnings growth.
        2. Trade-Free Zone with Europe:
           • Deflationary Benefits:
             • Eliminating tariffs on European goods could lower consumer prices on key imports such as automobiles, machinery, and pharmaceuticals, potentially reducing inflation by up to 1.2% on affected products (source: Atlantic Council).
           • Economic and Policy Implications:
             • A trade-free zone could partially offset inflationary pressures from other tariffs, supporting monetary stability.
             • Reduced costs on transatlantic trade would enhance supply chains and provide flexibility for Federal Reserve interest rate decisions.

  Monetary Policy Considerations

  1. 1. 1. Underestimating Inflation Risks:
           • If inflation expectations remain too low while actual inflation accelerates, the Federal Reserve may be forced into aggressive tightening measures, including higher interest rates.
           • Consequences:
             • Increased borrowing costs for consumers and businesses, reduced spending and investment.
             • Depressed corporate profits as rising costs erode margins.
             • Elevated recession risks due to tightening credit conditions.
        2. Market Impact:
           • Rising inflation expectations would likely push bond yields higher, leading to volatility in equity markets.
           • Investors could reallocate capital from risk assets (e.g., equities) to fixed income, weakening stock market valuations.
           • The potential for stagflation—a combination of high inflation and stagnant growth—could further undermine economic confidence.

  Conclusion

  Inflation expectations in January 2025 may understate risks associated with tariffs and global trade dynamics. Increased tariffs with key trading partners such as China, Canada, and Mexico could amplify inflationary pressures, while a trade-free zone with Europe offers a promising avenue for deflationary relief. However, the Federal Reserve faces a delicate balancing act: underestimating inflation could force tighter monetary policy, increasing borrowing costs and recession risks. For markets, rising inflation expectations would lead to volatility, as investors recalibrate portfolios in response to shifting risk dynamics. Managing these challenges will require careful coordination of trade and monetary policies to ensure economic stability.
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  Energy Production: First-Term Achievements and Second-Term Prospects

  During Donald Trump’s first term, the United States experienced a significant expansion in oil and natural gas production. The administration prioritized deregulation, resulting in record-setting production levels. According to the US Energy Information Administration (EIA), crude oil production grew by nearly 3 million barrels per day from 2016 to 2020, making the US a net exporter of energy for the first time in decades. Natural gas output also surged due to advances in hydraulic fracturing and a supportive regulatory environment.

  In a potential second term, the Trump administration may seek to build on these gains by further increasing domestic production. This would likely involve additional deregulation, streamlining permitting processes, and opening up more federal lands and offshore areas for drilling. However, while the opportunities for expansion are substantial, the benefits to the US labor market, energy prices, and inflation may vary in timing and magnitude.

  Immediate vs. Delayed Benefits

  1. 1. 1. Labor Market:
           • Immediate Benefits: Increased drilling and production activities could lead to job creation in oilfield services, construction, and supporting industries. Short-term employment gains may be concentrated in energy-producing regions like Texas, North Dakota, and New Mexico.
           • Delayed Benefits: Broader labor market effects may take time as infrastructure projects, such as pipelines and refineries, require longer development periods.
        2. Oil and Gas Prices:
           • Immediate Impact: Expanded production capacity could initially stabilize or lower domestic energy prices, particularly if global demand remains steady.
           • Delayed Impact: Full-scale price reductions depend on overcoming logistical constraints and market absorption of additional supply, which could take months or years. External factors, such as OPEC decisions and geopolitical tensions, may also temper the price effects.
        3. Inflation Reduction:
           • Immediate Effects: Lower energy prices can directly reduce inflation by cutting costs for transportation, manufacturing, and consumer goods.
           • Delayed Effects: If environmental opposition, regulatory hurdles, or global market volatility slow production growth, inflation relief may take longer to materialize.

  Challenges to Second-Term Expansion

  1. 1. • Global Energy Market Uncertainties: Unpredictable global demand, shifting energy policies, and competition from other oil-producing nations could limit the pace of production growth.
        • Environmental Opposition: Resistance from environmental groups and legal challenges could delay projects, potentially dampening the intended economic and inflationary benefits.
        • Technological and Infrastructure Constraints: While technological advances have enabled rapid growth, aging infrastructure and supply chain bottlenecks might slow progress.

  Conclusion

  While the Trump administration’s first-term achievements in energy production set a strong foundation, the second term’s expansion efforts could face more complex challenges. Immediate benefits to the labor market and energy prices may be realized, but broader economic gains, including significant inflation reduction, could be delayed. The success of these efforts will depend on overcoming regulatory, market, and logistical barriers while balancing environmental and sustainability concerns.
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  The US Credit Cycle: From Late-Stage Expansion to Significant Stress

  January 2017: Late-Stage Expansion

  1. 1. • The US credit cycle in January 2017 was marked by a robust economy with manageable credit conditions. Credit spreads remained healthy, corporate debt levels were under control, and consumer defaults were relatively low, reflecting strong financial resilience across sectors.

  January 2025: Credit Cycle Stress

  1. 1. • By January 2025, the credit cycle has shifted dramatically. According to S&P Global Ratings, the following indicators highlight heightened stress:
          • Tight Credit Spreads: Indicating limited compensation for risk and a potential mispricing of credit conditions.
          • High Corporate Debt Issuance: Companies have taken on significant debt, increasing vulnerability to economic downturns.
          • Rising Consumer Defaults: Higher default rates suggest growing financial strain among households, likely driven by inflation, wage stagnation, or other economic pressures.

  Challenges for Policymakers and Investors

  1. 1. • Policymakers:
          • Must carefully manage monetary and fiscal tools to balance growth and inflation without worsening credit conditions.
          • Risk of overcorrection: Tightening monetary policy further could exacerbate credit stress, while excessive easing may fuel inflation.
        • Investors:
          • Face a complex environment where traditional safe havens (like bonds) may not provide the expected stability due to rising yields.
          • Increased emphasis on diversification and risk management will be essential to navigate this volatile period

  Conclusion

  The US credit cycle’s progression from late-stage expansion in 2017 to significant stress in 2025 highlights the evolving challenges in the economic landscape. Tight credit conditions, rising defaults, and inflationary pressures create a precarious environment that requires careful navigation by policymakers and market participants. Without strategic interventions, these factors could escalate, leading to heightened economic instability and prolonged market turbulence.
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  Deregulation: First-Term Achievements and Second-Term Potential

  1. 1. 1. First-Term Deregulation Achievements
        • During his first term, President Trump aggressively pursued deregulation across multiple sectors, aiming to stimulate economic growth and reduce compliance burdens on businesses. Key actions included:
          • Energy: Repealed the Clean Power Plan, enabling greater flexibility for coal-fired power plants and fostering increased oil and gas production.
          • Finance: Rolled back portions of the Volcker Rule, allowing banks more freedom in trading and investment activities.
          • Environmental Policy: Repealed the Waters of the United States (WOTUS) regulations, reducing restrictions on land use for industries like agriculture and construction.

  These measures, according to the American Action Forum, were credited with reducing costs for businesses and encouraging economic expansion, albeit with criticisms regarding long-term environmental and social impacts.

  1. 1. 2. Second-Term Deregulation Potential
        • A second Trump term may continue to prioritize deregulation, but the landscape has changed. Key considerations include:

  Opportunities for Further Deregulation:

  1. 1. • • Remaining regulations in areas such as technology, healthcare, and advanced manufacturing may be targeted for rollbacks.
          • Energy policy could see additional deregulation, potentially focusing on renewable energy markets to encourage private-sector-led growth.

  Challenges and Diminishing Returns:

  1. 1. • • Political Opposition: A divided Congress or stronger public and state-level resistance may slow new deregulation initiatives.
          • Diminishing Impact: Many high-impact regulatory changes have already been implemented, leaving fewer opportunities for transformative effects.
          • Economic Context: The effectiveness of deregulation in addressing inflation risks may be limited in an environment with persistent global supply chain constraints and monetary policy tightening.

  Implications for Inflation and Economic Growth:

  1. 1. • Potential Benefits:
          • Reducing compliance costs for businesses could enhance productivity and encourage investment.
          • Easier permitting processes may stimulate job creation and infrastructure development, contributing to economic resilience.
        • Potential Limitations:
          • The inflationary environment may not be fully mitigated by deregulation, as structural factors like energy prices, global demand, and supply chain disruptions play a more significant role.
          • Regulatory rollbacks that prioritize short-term economic gains could exacerbate long-term risks, including environmental degradation or financial instability.

  Conclusion

  While deregulation was a hallmark of Trump’s first term, its potential effectiveness in a second term faces headwinds from political, economic, and structural realities. The focus may shift from sweeping deregulation to more targeted efforts, with mixed outcomes in addressing inflation risks and fostering sustained economic growth.
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  Stock Market Outlook: Earnings-Driven Growth Amid Elevated Risks

  As of January 2025, stock market growth is expected to rely solely on earnings performance, with little to no room for price-to-earnings (P/E) multiple expansion. This delicate balance underscores the importance of low inflation expectations and the avoidance of policy missteps to sustain market momentum.

  Key Risks and Implications

  1. 1. 1. Missed Expectations Due to Rising Inflation:
           • Higher-than-expected inflation could directly erode corporate profitability by increasing input costs and weakening consumer purchasing power.
           • This would likely result in earnings downgrades, increased market volatility, and diminished investor confidence.
        2. Complicated Monetary Policy:
           • The Federal Reserve may face pressure to pause or reverse the current rate-cutting cycle if inflation persists.
           • A return to monetary tightening could destabilize markets, prompting a sharp repricing of equities and fixed-income assets.
        3. Elevated Market Risks:
           • With valuations already high, even minor disappointments in earnings or inflation forecasts could trigger a significant contraction in P/E multiples.
           • Such a correction could exacerbate broader market risks, especially if combined with external shocks or geopolitical uncertainties.

  Expected Market Performance

  1. 1. • Baseline Scenario (High Probability):
          • The S&P 500 is likely to achieve an 8%-10% return in 2025, driven by steady corporate earnings growth.
          • This assumes a stable inflation environment, accommodative monetary policy, and no major economic disruptions.
        • Downside Scenario (Low Probability):
          • Inflationary pressures or unexpected economic shocks could result in flat to negative returns for the S&P 500.
          • In this scenario, higher costs, declining earnings, and monetary policy tightening would drive a downward market correction.

  Overall Conclusion

  The elevated valuations of the stock market in 2025 leave little room for error. Earnings growth will be the primary driver of returns, with the broader market dependent on low inflation expectations and prudent Federal Reserve actions. Rising inflation poses a critical risk, as it could lead to missed corporate expectations, abrupt monetary policy shifts, and a sharp contraction in elevated P/E multiples. Investors should prepare for a challenging environment, balancing optimism for modest returns with the reality of heightened market sensitivity to inflationary pressures and policy adjustments.

  Sources: FactSet, Bloomberg, Goldman Sachs, Congressional Budget Office, Federal Reserve Bank of New York, University of Michigan, EIA, Peterson Institute for International Economics, Atlantic Council, S&P Global Ratings, Brookin Action Forum Institution, America