Economic Outlook: Trump's Return and Market Instability in 2025

Investing.com — Donald Trump’s potential return to the White House may lead to increased market instability in 2025, according to Piper Sandler. The investment bank described the current economic environment as a “recipe for volatility.”

Piper Sandler draws parallels to the early 1980s, suggesting that Trump's return resembles the conditions Ronald Reagan faced upon taking office, dealing with inflationary pressures and significant policy dysfunction.

The bank notes that Trump would assume the presidency after years of stimulative fiscal and monetary policies, similar to Reagan's environment. Federal spending has surged, inflation remains persistent, and bond markets are already reacting.

“Bond vigilantes” have begun to drive yields higher, predicting that the Federal Reserve's recent rate cuts might have been overly aggressive.

Federal outlays increased by 10.4% year-over-year in 2024, contributing to ongoing inflation. Piper Sandler contrasts this with tariffs, which act as a one-time tax rather than a continuous inflation driver. While tariffs may push related prices higher, their inflationary effect is minimal compared to unchecked government spending.

Uncertainty surrounding fiscal policy under Trump could amplify market volatility in 2025. Key factors include federal spending trends, potential new tariffs, and uncertainty about corporate tax rates. While deregulation and tax cuts may enhance productivity, the immediate concern revolves around Trump's approach to tariffs, which could reduce consumer spending power and affect markets.

Monetary policy poses another risk, as inflation shows persistent signs despite the Fed's easing attempts. Additionally, geopolitical tensions, including U.S.-China relations and conflicts in the Middle East and Europe, further complicate the economic landscape.

“Jitters are already visible in the data, with both the Empire State and Philly Fed manufacturing expectation indices showing a decline in December after the November election euphoria,” Piper strategists noted.

The firm anticipates 2% GDP growth for 2025 but warns of potential volatility ahead. “There are significant risks of volatility as Washington (ideally) shifts to more sustainable fiscal policies (slower spending, less regulation, ongoing low taxes) and monetary policies (fewer rate cuts). This could position us for stronger GDP growth,” the report states.

In the short term, evolving fiscal uncertainty under Trump’s leadership is expected to contribute to a turbulent year ahead.