Morgan Stanley notes that Trump’s re-election could change the world, focusing on three key areas: 1) the potential extension of the Tax Cuts and Jobs Act, likely increasing federal deficits while also supporting corporate valuation multipliers; 2) proposed tariffs on Chinese goods that could raise inflation and weigh on U.S. economic growth; and 3) Trump’s anticipated deregulatory approach, which could benefit sectors like energy, financial services, pharmaceuticals, and cryptocurrency, while posing policy risks for clean energy and electric vehicles.

The investment bank outlines the three major policy areas investors worldwide should watch in the coming period:

• Taxes, Debt, and Deficits: In 2025, major provisions of the 2017 Tax Cuts and Jobs Act (TCJA) will be reconsidered, including individual, corporate, and capital gains tax rates. These could have substantial implications for individual investors and businesses, as well as U.S. debt and deficits. For example, removing the $10,000 cap on State and Local Tax (SALT) deductions could add roughly $200 billion to the federal deficit. Republicans have also proposed lowering the corporate income tax rate from 21% to 15% and may seek to revive the 100% bonus depreciation. This would likely add further to the deficit but could boost corporate profits and temporarily rally the markets. Trump is expected to push for making TCJA cuts permanent, but any significant changes would require Congressional approval, with record-high debt and deficits likely playing a central role in negotiations over a final tax bill. The Congressional Budget Office predicts that under Trump’s broader policies (not just tax policies), the national debt could increase by $7.75 trillion over the next decade. As lawmakers likely seek a balance between revenue and spending, enacted tax policy changes may be more moderate than campaign proposals.
• Trade and Tariffs: Unlike tax policy, which depends on Congressional approval, U.S. trade and tariff policy can often be influenced or enacted directly via executive order. Trump’s proposals for imposing 60% tariffs on Chinese goods and potentially a 10% universal tariff could adversely impact economic growth and drive inflation upward. Specifically, these measures could raise inflation by 2.5% and reduce GDP by 0.5% within two years of their implementation, according to Bloomberg Economics. However, Trump’s full trade agenda remains unclear, presenting a downside risk for investors. Morgan Stanley encourages investors to consider defensive sectors and stocks in consumer goods, healthcare, utilities, and select retail with limited offshore production exposure if tariffs are raised.
• Deregulation: Deregulation may be a focal point of Trump’s second term. While U.S. crude oil production is at a record level and additional supply could curb oil prices, oil and gas producers are still likely to benefit from deregulation. For instance, Trump may reverse the Biden administration’s halt on new natural gas permit approvals, speed up approval timelines, and ease licensing processes. Financial services could also see reduced regulatory burdens, potentially boosting the banking sector and supporting mergers and acquisitions. Reduced requirements in pharmaceuticals and biotechnology could accelerate drug approvals, benefiting these industries. Additionally, cryptocurrency and blockchain might receive favorable treatment under a Trump administration and a Republican Congress, while the broader tech sector and AI policy might benefit from lighter federal oversight. Conversely, some sectors may face increased risks under Trump’s policies. The clean energy sector, in particular, could suffer if tax credits for clean energy are rescinded, despite their popularity in some Republican circles. The electric vehicle industry and related infrastructure may also see less federal support, impacting growth in this innovative field. Finally, some sectors may retain bipartisan support. For instance, policies supporting semiconductor industry growth and reshoring, along with broader national security concerns—such as defense spending and cybersecurity—are expected to remain strong due to ongoing geopolitical tensions and the strategic need to reduce reliance on foreign critical materials.