What Does Donald Trump’s Win Mean for the Economy?

The 2024 U.S. presidential election was a close race – until it wasn’t. Donald Trump leaned on a variety of themes that resonated with voters, particularly around the economy, and is now projected to secure a second term in the White House. Republicans also won control of at least one chamber of Congress.

Stock markets surged following the definitive election outcome, but investors are still assessing how Washington’s new political landscape will impact the economy and markets. To shed light on that question, BMO hosted The Election Effect: What’s Next for the Economy, Markets, and Interest Rates, a panel discussion featuring:

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  Camilla Sutton, Managing Director, Head of Equity Research, Canada & UK (moderator)

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  Doug Porter, Managing Director and Chief Economist

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  Brian Belski, Chief Investment Strategist

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  Ian Lyngen, Managing Director and Head of U.S. Rates Strategy

Here are some of the key takeaways.

The strong initial market reaction to President-Elect Trump’s win provides some clues to what markets anticipate for the next year, explained Doug Porter. “Fundamentally, we’re looking at some upside risk to growth and inflation, a little bit of a stronger U.S. dollar, perhaps a wee bit less Fed easing than would have otherwise been the case,” he said.

Porter explained that another reason for the immediate positive market reaction is the view that the 2017 tax reform will be extended and the new administration will likely adopt a lighter regulatory touch. That would benefit the financial sector in particular, he added.

When Trump takes office in January, he will inherit a fundamentally strong economy with GDP growth hovering around 3% for the past year, which is ahead of the long-term average and above the consensus estimate. Meanwhile, inflation is close to the Federal Reserve’s target range, while the unemployment rate is at a healthy 4.1%.

The one “sour” reaction to the election results has been in the bond market, where yields have risen, said Porter, adding the $1.8 trillion budget deficit could also weigh on bond markets.

Taxes and tariffs were key parts of Trump’s successful campaign. Still, there was consensus on the panel that the rhetoric from the campaign could be very different from the reality of policy that emerges over the next few years. Porter expects the next Trump administration to adopt a lighter touch on the taxation front while putting the focus on tariffs.

Although a 10% tariff on all imports would be significant, a number Trump proposed on the campaign trail, Porter and Ian Lyngen shared the view that the tariffs may not trigger runaway inflation. He said it would depend on how nations reacted, adding that a stronger U.S. dollar could offset some of the inflationary effects.

“Tariffs aren’t necessarily reflationary,” said Lyngen. “In fact, they could be a bigger drag on global growth.” In his view, Trump’s immigration policy could have broader implications for the U.S. economy as employers struggle to fill vacancies.

Although Trump has often mentioned tariffs being a feature of his trade policy, Porter expects his focus to be mainly on China. “I do not take the threats of heavy increases of tariffs on China lightly at all,” he said. “I don’t know about a 60% tariff, but I would not at all be surprised if we are looking at a significant increase in tariffs on China in the years ahead.”

Lyngen expects the Fed to cut rates again in December and then move to a quarterly cadence of 25 basis point cuts in 2025.

Still, there are two ways the election outcome could result in either a slower return to normal or a lengthier pause by the Fed, explained Lyngen. One way is to introduce significant tariffs and fiscal reforms, although Lyngen feels that path is unlikely. The other way would be if the equity market continues to rally further from here, which could be unwelcome from the perspective of monetary policymakers as it could constrain their options and create asset bubbles, he explained.

Although the Bank of Canada (BoC) has said it is not concerned with a policy gap with the Fed or the near-term effects on the dollar, Brian Belski noted that could change if upside risks for U.S. growth and inflation cause the Fed to be more cautious in terms of their rate-cutting cycle.

While Porter agrees with Belski’s assessment, he said BMO maintains the view that the BoC is on track to make a series of 25-basis-point cuts, ultimately taking the overnight rate down to 2.5% by mid-2025. “Fundamentally, that’s one of the reasons why the Canadian dollar has come under pressure.”

Despite the market’s reaction to the election, Porter and Belski downplayed the impact that politicians have on the economy. “At the end of the day, politicians do not drive the economy,” said Porter. “Fundamentally, there are 160 million Americans getting up every day and going to work and a little over 20 million Canadians – that’s what ultimately drives the economy. It’s not the political backdrop.”

The reason markets have been so strong has everything to do with fundamentals, said Belski. “In my 35-year career, I’ve never seen certain areas of the market look so sound in terms of being able to understand how earnings look, balance sheet strength, debt-to-equity levels, operating income and things like return on equity, return on assets.”

Against that backdrop, Belski said his team remains very bullish on the U.S. and, by extension, Canada. “As America goes, so goes Canada,” he explained. Currently, Belski said that both the S&P 500 and the S&P/TSX are on pace to hit their targets of 6,100 and 25,000, respectively.

“Canada is a true stock pickers market,” he said. “If you take out the biggest 60 companies in Canada, Canada is really a small mid-cap index.”

More broadly, with interest rates coming down and growth moderating, Belski is hopeful investors will experience fewer days of the wild, volatile swings in markets.

For those anxious about what the election means for their portfolio, Belski said you have to focus on the facts, not what pundits say on the news. “Don’t ever invest in noise or emotion; invest in the facts,” he said.

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