ISQ - January 2025
Key Takeaways
We view the key market-relevant policies of the Trump administration as: tariffs; the debt limit; appointing key personnel; budget reduction; and tax cuts.
Trump’s appointments seem to indicate his seriousness about aggressive policies on tariffs and trade policy. Tariffs may also be used as a negotiating tool.
The timing, magnitude, and tempo of these policies is still uncertain. We will be monitoring market reaction closely.
The election of Donald Trump to a second term and the GOP sweep of Congress is a repeat of the 2016 election, but we see a considerable debate about the agenda for his second term. Echoing his first term, tax change, tariffs, and immigration all remain at the top of his agenda. In the ‘what’s new’ camp we highlight a much smaller Republican House majority (in the single digits, compared to the 23-seat majority of 2017), but more Congressional allies and a more robust transition team. A key dividing line for the 2025 policy agenda will be agenda items that can be achieved through executive authorities (including tariffs and immigration), and those requiring Congressional authorisation (such as taxes and the debt limit). It will likely be full speed ahead for many of those executive-driven actions given Trump is seeking to avoid the multi-year negotiations that delayed his first term agenda.
The small House majority will introduce new hurdles to the passage of key fiscal legislation, including raising the debt limit, extending the 2017 Tax Cuts and Jobs Act ahead of its expiration in December, and any desired changes or repeals to the 2022 Inflation Reduction Act. A guiding principle for watching Trump 2.0 will be to ‘expect the unexpected’ and we expect to see frequent diversions from the traditional DC playbook. With that uncertainty as a caveat, we attempt to provide a playbook for how some of the top market-relevant Washington fights could play out in 2025.
A guiding principle for watching Trump 2.0 will be to ‘expect the unexpected.’
We view his nominations to key posts (including Treasury, Commerce, and the US Trade Representative) as early indicators of his seriousness for aggressive trade and tariff actions.
Tariffs have formed the centrepiece of Trump’s fiscal and foreign policy agendas, and our base case is that tariffs (including those targeted at specific countries, as well as a global tariff), are coming—but the specifics remain up in the air. As an example, Trump has already vowed to impose sweeping Day 1 tariffs on China, Mexico, and Canada in response to fentanyl and immigration concerns. The pre-inauguration announcement of the tariffs underscores a key dynamic in Trump’s tariff strategy: his desire to negotiate and make deals. The timing should be viewed as an initial attempt to bring potentially impacted countries to the negotiating table early on. Trump will highlight in his negotiations that each country can avoid these tariffs by addressing his concerns, but his wish to negotiate does not mean he will not follow through on his tariff threats if a desired outcome is not secured. Trump has a range of authorities at his disposal to implement his suite of tariff proposals which also include the authority to impose a 10-20% global tariff. Several of those authorities would allow him to implement new tariffs almost immediately, and even for tariffs with longer procedural requirements, we would expect those to move relatively quickly.
Additionally, we view his nominations to key posts (including Treasury, Commerce, and the US Trade Representative) as early indicators of his seriousness regarding aggressive trade and tariff actions. Congress is also likely to support these actions and could provide new authority that would allow the president to address trade deficits and tariff barriers imposed by other countries against the US. These new powers could usher in trade deals that would be viewed as significantly beneficial to US companies and US exports. Ultimately, the timing and scope of these actions will dictate the economic and market impact.
Key to the policy specifics and implementation of priority agenda items will be the personnel appointed to manage those issues. While Trump announced his cabinet picks and other key appointees throughout November and December, the fate of many of his selections will lie with the Senate confirmation process. The Republican Senate majority and a push for deference to the president will mean that many will be confirmed, but some of the more controversial picks will face an uphill battle. Trump has indicated his willingness to use recess appointments if the Senate does not approve his nominees. Legal hurdles implemented by the Supreme Court in 2014, following the use of this power by President Obama, limits this authority. The 2014 ruling adds to the uncertainty surrounding the outcome.
Alongside personnel confirmations, the return of the debt limit will be a top priority in the early days of the new 119th Congress. While we expect the debt ceiling eventually to be raised, the narrow House GOP majority, the number of Republican members of Congress who have never and will never vote to raise the debt limit and the political drama previewed in the December 2024 government funding debate will likely introduce volatility to the process. The debt limit is subject to a 60-vote threshold in the Senate, requiring Democratic support for its passage. Using the last debt limit debate as a guide, we would expect the X-date (when the US government can no longer fulfil its debt obligations through the use of extraordinary measures) to fall roughly mid-year, and the debt limit debate will accordingly become a priority in the first half of 2025. On politically tough votes, additional measures are frequently added to provide incentive for members to vote in support; therefore, it is likely that measures to speed up infrastructure and energy-related projects are added to the increase in the debt limit. This would be viewed as adding to the economic growth of the US and positive for industrial projects.
Trump’s announcement of the ‘Department of Government Efficiency’ (DOGE), to be led by Elon Musk and Vivek Ramaswamy, has pushed the US budget and its process into the spotlight. We expect DOGE to have the most success in its push for deregulation, aided by a series of Supreme Court rulings that will make it easier to challenge existing regulations. Their effort to reduce government spending will be a more difficult challenge. A key challenge will be getting Congress to support their budget cut recommendations. The slim House Republican majority and the 60-vote threshold in the Senate are key hurdles here. A wildcard in this effort will be a court challenge to limits on the president’s authority to withhold funds appropriated by Congress. We expect the Trump administration to challenge a 1974 law that restricts this authority. The outcome of that court case could determine the extent of the budget impact of DOGE. Separately, there are areas where increased near-term government spending may be suggested to increase longer-term government efficiency. Many government technologies are outdated and with the tech backgrounds of Musk and Ramaswamy, we could see an effort for upgrades that have better cybersecurity and position the US government for efficiency.
We expect DOGE to have the most success in its push for deregulation … efforts to reduce government spending will be a more difficult challenge.
The individual portions of the 2017 Tax Cuts and Jobs Act (TCJA) are set to expire on 31 December 2025. The cost of a ten-year extension is estimated at $4.6 trillion, and President Trump has promised additional changes to the tax code as part of this extension. Most of the corporate tax changes, including the 21% corporate tax rate, were made permanent in 2017, while several important business provisions that incentivize investment in new equipment have expired and are part of the extension conversation. We expect Congress to use the budget reconciliation process to pass this tax law, as it only requires a simple majority in the House and Senate (no 60-vote Senate filibuster) for passage. As such, we expect the bill to pass on a party-line vote. The lower vote threshold does not guarantee smooth sailing, as the House majority is razor thin.
The slim House Republican majority and the 60-vote threshold in the Senate (which requires Democratic
support) are key hurdles.
Our base case for the tax bill is an extension of the expiring provisions, but the extension may be shortened to four or five years (versus the ten years allowed under congressional rules) to reduce the cost of the extension. A four or five-year extension would cost closer to $2 trillion. The tax bill is likely to include provisions such as the no tax on tips, overtime, and Social Security promoted by President-elect Trump during the campaign. However, those provisions are likely limited to lower-income households that are already excluded from paying federal income taxes.
The debate over the state and local tax (SALT) deduction cap will likely be a major battleground (and key example of the precariousness of such a slim House majority), especially for House Republicans in jurisdictions with high state and local taxes, such as New York, New Jersey, and California. There have been proposals to increase the current SALT limit from $10,000 to $20,000, while limiting the extra deductions for households with income less than $500,000. The expiration of the current estate tax limit is likely to be extended as part of the larger package, but we will be watching developments closely.
Offsetting the cost of these tax changes could have significant market and sector impacts. New tariff authority, the potential repeal of the Inflation Reduction Act (IRA), entitlement reform, cuts suggested by DOGE, and many other provisions are all on the list of potential offsets.
Issued by Raymond James Investment Services Limited (Raymond James). The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance is not a reliable indicator of future results. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. The taxation associated with a security depends on the individual’s personal circumstances and may be subject to change.
The information contained in this article is for general consideration only and any opinion or forecast reflects the judgment of the Research Department of Raymond James & Associates, Inc. as at the date of issue and is subject to change without notice. You should not take, or refrain from taking, action based on its content and no part of this article should be relied upon or construed as any form of advice or personal recommendation. The research and analysis in this article have been procured, and may have been acted upon, by Raymond James and connected companies for their own purposes, and the results are being made available to you on this understanding. Neither Raymond James nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon such research and analysis.
If you are unsure or need clarity upon any of the information covered in this article please contact your wealth manager.
APPROVED FOR CLIENT USE
Bear market of 1974The severe bear market of 1974 threatened the existence of Raymond James, which was bleeding capital by the day. Tom James, his father and other leaders took extreme measures to keep the firm afloat, slashing costs, forgoing pay checks and even attempting to sell the firm for just enough capital to protect client assets and retain as many associates as possible. The story could have ended very differently if not for a sharp upturn and continued rebound in the stock markets late in the year. |
|
Black MondayOn 19 October 1987, the stock markets experienced a dramatic plunge that prompted many firms to shut down their trading desks and turn off their phones to minimize internal losses. Raymond James refused to do the same. Our desks stayed open to help meet clients’ needs, resulting in our first and only unprofitable quarter since the firm went public in 1983. |
 |
Who was Raymond James?The Raymond in our name is actually from Edward Raymond, owner of a 15-employee mutual fund sales group, Raymond and Associates, along Florida’s west coast. He sold his company to Bob James on 15 July 1964, on condition that the surviving firm be called Raymond, James & Associates. Three days after the sale, Ed Raymond was involved in a near-fatal automobile accident and never joined the firm. Nonetheless, even after Raymond had passed away, Bob James insisted that his name remain on the door – ahead of James’ own. That was a promise he made to Ed Raymond three days before the accident, and Bob James was a man who kept his promises. |
|
Taking Raymond James PublicWhen consideration was being given to taking Raymond James public, Tom James penned a letter to shareholders (largely employees at the time). ” … the public offering should be considered as a statement of our independence. While this is a psychological rather than an economic rationale, it is nonetheless very important. We have asserted for some time that we are not interested in becoming a small part of a very large corporation. That assertion results mainly from the inclinations of management rather than the economic benefits associated with either alternative. The public stock offering affords us the opportunity to enjoy a little bit of the best of both worlds. While shareholders will be given liquidity at fair market value, we will still have the ability to control our own destiny.” After 40+ years of Tom’s leadership, upon becoming CEO, Paul Reilly was often questioned about whether the company might ultimately surrender its cherished independence and be acquired by some larger entity. His response: “Not while I’m around.” It’s a theme that continues today. |
 |
