Starting conditions today differ starkly from 2017. Government finances are far more stretched, limiting the scope for new fiscal stimulus. Inflation remains somewhat elevated, forcing the Federal Reserve to maintain tighter monetary policy. Higher interest rates are biting: job creation has slowed, the housing market has weakened, and businesses are cutting back on investment. 

Government finances are already stretched.
Budget surplus or deficit, % share of gross domestic product
1980 – 2024

Investors are already wary of a renewed immigration crackdown that could drive up labour costs, eroding corporate profits. Another trade war might compound inflation while denting consumer spending. Trading partners could retaliate with measures that sap American exports. Prolonged policy uncertainty could chill business investment, unleashing an adverse market reaction and forcing Trump to water down his plans.

Markets have also priced in another round of American exceptionalism. A string of positive data releases has led investors to recalibrate interest rate expectations, stock valuations now sit at lofty levels, and the trade-weighted exchange rate is nearing multi-decade highs. This will make further outperformance more difficult. 

Market valuations are at extremes.
Change in total equity market capitalisation, billions USD
January 2016 – December 2024

Investors banking on a sequel may be forgetting a key lesson from Trump’s first term: policy wins are easier to deliver when economic tailwinds are strong. This time, the headwinds are already blowing.