The second Trump presidency has kicked off with a whirlwind of activity that even Washington’s seasoned insiders find dizzying. There’s been an avalanche of sackings across federal agencies, threats of increased tariffs directed at both allies and adversaries, and a scramble to push a Republican budget through a sharply divided Congress.
Despite the chaos, business leaders and investors remain remarkably unfazed. “Markets aren’t showing much concern,” observed Jason Pride, chief of investment strategy and research at the Glenmede Trust Company. However, this carefree attitude might take a turn, potentially affecting both the market landscape and the broader U.S. economic forecast.
Investors are banking on the continuation of the tax cuts from Trump’s previous term, cuts which primarily benefited the affluent and businesses. Trade organizations like the Business Roundtable and the National Association of Wholesaler-Distributors are optimistic that these cuts will indeed be extended. Not extending them, explained Mr. Pride, would effectively mean a tax hike.
Yet, nothing is set in stone. Funding these extended cuts is projected to cost a staggering $4 trillion over the next decade. Consequently, Congress is embroiled in negotiations over which other financial areas can be trimmed or which benefits might face the chopping block.
Turning to the bond market, usually a barometer for inflation and potential downturns, traders have largely shrugged off the flux caused by Trump’s unpredictable tariff negotiations. The general consensus is that the tariffs are more a strategic bargaining chip than a core revenue driver, despite how the administration portrays them in budget discussions.
Some of this market composure can be attributed to the faith placed in Treasury Secretary Scott Bessent. Having transitioned from a billionaire hedge fund manager to his current role, Bessent has managed to assure many analysts that the ultimate policy production from the White House will be advantageous. According to Matt Luzzetti, the chief economist at Deutsche Bank, Bessent has also fostered optimism about reducing future deficits.
Yet, it’s challenging to reconcile this optimism with Bessent’s aim of solidifying Trump’s 2017 tax cuts and Trump’s recent insistence that social safety nets, which his supporters rely on—such as Social Security, Medicare, and Medicaid—should remain untouched by budgetary cuts.
Several Republican lawmakers, including Senator Josh Hawley from Missouri, have echoed this sentiment. Others, however, are pushing for deeper spending cuts. With the GOP holding a slim majority in both chambers of Congress, it’s uncertain which legislative agenda will ultimately gain traction.
A notable buzz in the cost-saving narrative revolves around the Department of Government Efficiency, or DOGE, spearheaded by Elon Musk to overhaul federal operations. For many business executives, including a co-founder of Airbnb and the CEO of Palantir, Musk’s initiative promises to uncover major inefficiencies and fraud, potentially redirecting substantial sums towards tax cuts in future budgets.
While Trump and Musk tout that their cost-cutting efforts could yield trillions in savings, a New York Times analysis of the $55 billion in anticipated savings from DOGE points out numerous accounting oversights, outdated assumptions, and other errors.
David Rogal, a lead portfolio manager at BlackRock, highlighted the constraints of reducing the deficit without raising taxes. “Over 90% of government outlays are tied up in nondiscretionary, interest, and defense spending,” he said, emphasizing the limitations of deficit reduction through spending cuts alone.
Critics from conservative think tanks argue that Musk’s narrative misleads the public regarding the true composition of federal expenditures. Jessica Riedl, a senior fellow at the Manhattan Institute, remarked, “If your focus isn’t primarily on major budget areas like Social Security, Medicare, Medicaid, defense, and interest payments, you aren’t a serious spending-focused deficit hawk.”
Should the tax cuts lapse, Glenmede’s Mr. Pride anticipates a slowdown in economic growth. Alternatively, substantial budget cuts could have equivalent effects by reducing governmental economic injections.
Beyond implications for healthcare and food security, many economists warn that Congress’s proposed spending cuts, potentially leading to extensive federal job losses, could stifle job creation and retail activity.
The business sector has long argued that tackling federal deficits should center on reducing expenditures rather than increasing tax revenues. However, with rising obligatory spending on senior benefits and expanding military budgets, balancing the books is becoming increasingly challenging.
On the campaign trail, Trump made numerous populist tax promises, such as eliminating taxes on tips, reducing levies on domestically produced goods, and removing taxes on Social Security income. Despite their popularity, these collectively $1 trillion initiatives are seemingly slipping down the legislative agenda.
“The administration has numerous tax and spending reduction proposals but few credible ways to pay for them,” noted Stan Veuger, an economist at the American Enterprise Institute. Kim Wallace of 22V Research expressed concern that without clear resolutions by year’s end, disagreements over budgetary figures might emerge between Congress and nonpartisan evaluators, potentially unsettling markets.
Despite potential market disruptions, there’s a prevailing belief among economists, policy analysts, and Wall Street wealth managers that a fiscal solution will emerge. Luzzetti from Deutsche Bank speculated that a likely strategy involves shortening the horizon for tax cuts, initially reducing apparent costs but leaving room for future extensions.
While this approach may increase future deficits, it seems designed to reassure corporate America. At the same time, markets remain fixated on medium-term inflation and interest rate trends. Generally, tariffs are seen as inflationary since firms often pass costs to consumers.
Bessent has confidence in stable inflation expectations. He suggests that any tariffs will result in a “one-time shift” in pricing rather than ongoing inflation, a view bolstered by a Federal Reserve representative. Trump’s recent proposal for reciprocal tariffs against all trading partners, coupled with ongoing metal tariffs and threats to Canada and Mexico, might unsettle global markets. However, bond investors have taken comfort in the vague rollout timeline, with tariffs unlikely to be enacted before early April.
