As Donald Trump prepares for a potential second term in the White House, the stock market has once again become a central focus for the former president. However, his economic policy proposals have raised concerns among strategists, who warn of increased inflation and slowing growth. Investors who have enjoyed the S&P 500's impressive rally since the start of 2023 now find themselves in a delicate balancing act, hoping that Trump's fear of damaging a market rally will temper his more aggressive policy plans.

The Trump Effect: A Double-Edged Sword for Investors

During Trump's first term, the stock market was a key metric he used to gauge his success. He frequently took credit for equities rallies, urged Americans to buy the dip, and even considered firing Federal Reserve Chairman Jerome Powell, whom he blamed for a market selloff. Now, as he prepares for a potential second term, the market remains a central focus, but his economic policy proposals have raised concerns among strategists.Many of Trump's campaign promises, such as hefty tariffs, mass deportations of undocumented workers, and tax cuts targeted at corporations and wealthy Americans, are not typically considered investor-friendly. However, Wall Street appears to be betting that the former president's sensitivity to market performance will lead him to pivot away from policies that could negatively impact equities.

The Tariff Tightrope: Balancing Trade and Stocks

One of the key risks investors are closely watching is the possibility of tariffs. Trump has proposed a 10% to 20% tariff on imports from all countries, which could lead to a 10% pullback in US equities and a mid-single digit decline in S&P 500 profits, according to UBS strategists. The universal tariff combined with a proposed 60% or higher levy on goods from China could shave 3.2% off S&P 500 companies' earnings in 2025, according to Barclays.However, investors are betting that Trump's sensitivity to equity markets will temper his approach to tariffs. Wall Street leaders, such as JPMorgan Chase CEO Jamie Dimon, have expressed confidence that the president-elect will want to avoid triggering a stock market selloff with his trade policies.

The Fiscal Tightrope: Balancing Stimulus and Inflation

Another key consideration is the potential impact of Trump's fiscal policies. In his first term, the former president passed a $1.3 trillion spending bill and a $1.5 trillion tax cut, which helped stimulate the economy and the stock market. However, the current high equity valuations and tight financial conditions could limit his ability to replicate that level of fiscal stimulus.Strategists warn that Trump 2.0 may be forced to curb fiscal policy and immigration, which were the "twin pillars of American outperformance relative to the rest of the world" during his first term. This could have implications for the bond market, as traders are betting on a selloff in Treasuries in the wake of Trump's win.

The Reactive Tightrope: Balancing Market Sensitivity and Stability

Finally, investors are concerned that Trump's sensitivity to market movements could be a double-edged sword. While his fear of damaging a market rally may temper some of his more aggressive policy proposals, his tendency to react to daily market moves could also be destabilizing.As Siebert's Chief Investment Officer Mark Malek noted, "If Trump is too reactive to daily market moves as he was during some passages of his first term, he along with many others, may find themselves getting whipsawed."Navigating the Trump tightrope will require a delicate balance for investors. While the former president's market sensitivity may provide some reassurance, his economic policy proposals and potential for reactive policymaking could still pose significant risks to the continued rally in US equities.