A Time to Reap

I know that I have been negative on many Trump policies in these pages, but to everything there is a season. For U.S. equity investors, early 2026 is a time to reap the benefits of Trump’s 2025 policies. Last year was tumultuous for policy, but policy uncertainty is fading, and the stimulative and pro-cyclical elements of the OBBB Act are becoming evident in early 2026. In addition, the Economic Surprise Index, which measures whether economic releases are beating or missing consensus expectations, has been steadily positive since mid-2025.
 

 

This macro backdrop forms the basis of a bullish environment for growth expectations and bullish tailwinds for risk assets in early 2026.
 

 

A Less Dire Outlook

Trump 2.0 in 2025 was marked by spikes in economic policy uncertainty. The U.S. Economic Policy Uncertainty Index spiked to an all-time high in the wake of the “Liberation Day” tariff announcements, but uncertainty has since faded. Markets adopted a risk-off tone as uncertainty rose and risk appetite reached a nadir in April.
 

 

Companies responded to heightened trade war uncertainty by putting expansion plans on hold, and hiring plummeted. In addition, the Trump Administration’s deportation policy reduced the size of the workforce, which resulted in a moribund no-hire-no-fire jobs market in 2025.
 

Since “Liberation Day”, the U.S. concluded a series of trade agreements with trading partners that reduced import duties to levels that are less dire than the initial “Liberation Day” proposals. Except for China, trading partners have not retaliated by erecting their own tariff walls, which alleviated market fears of a repeat of the Smoot-Hawley trade war-induced slowdown. Moreover, companies have learned to adapt to the heightened tariffs. The damage appears to be manageable and contained.
 

 

 

A 2026 Growth Boost

As the world entered 2026, uncertainty faded and the growth outlook improved.
The average tax refund from the passage of the OBBB Act is expected to see a significant jump, particularly in the top two or three quintiles of the income distribution. This K-shaped recovery should boost consumer spending in the early part of 2026.
 

 

The preliminary indications from Q4 earnings season were mostly upbeat. The remarks from the Bank of America’s CEO were typical of the positive view of the U.S. consumer: “With consumers and businesses proving resilient, as well as the regulatory environment and tax and trade policies coming into sharper focus, we expect further economic growth in the year ahead. While any number of risks continue, we are bullish on the U.S. economy in 2026.”

The Delta Air Lines earnings report underlined the nature of the K-shaped recovery. Delta’s Q4 premium cabin (business and first class) revenue exceeded all of its main cabin revenue, and its premium cabin revenue was positive in 2025 even as its main cabin revenue fell.
 

 

As a consequence, forward 12-month EPS estimates are rising strongly, which constitutes bullish fundamental momentum that should be supportive of rising stock prices.
 

 

The bonus is signs of stabilization and improvement in the employment market. The NFIB small business survey reported a tightening in the jobs market, which could point to job growth acceleration in early 2026. At a minimum, this is a constructive sign that the labour market is stabilizing.
 

 

Combined with a neutral to slightly easy bias to monetary policy, this combination points to a bullish backdrop for stock prices in early 2026.
 

 

Q2 and Q3 Challenges

As the mid-term elections approach, the Trump White House is trying to activate stimulus measures in the form of credit, fiscal and monetary stimulus. While some of those measures will undoubtedly boost the economy, the costs of those programs will become evident in Q2 and Q3.

On the credit front, CNBC reported that Trump “instructed his representative to buy $200 billion in mortgage paper”. As is the case with many Trump announcements, the details are unclear. Even though Fannie Mae and Freddie Mac are flush with cash, it’s unclear who the President’s instructions are directed at, and by what authority.

Morgan Stanley modeled the effects of $200 billion in mortgage purchases and found that the effects on growth and employment are relatively minor. A 1% decline in mortgage rates increases GDP by 0.1–0.15% and reduces the unemployment rate by 0.05%. The purchase of $200 billion in mortgages will narrow the mortgage to Treasury yield spread, though temporarily and the effects are likely to fade by late Q2 or Q3.
 

 

In addition, Trump’s announced attempt to cap credit card interest rates at 10% could resolve in a sudden consumer credit contraction, which resolves in a recession.
 

I have already discussed fiscal measures and the effects of the OBBB Act. The risk is an overly stimulative fiscal boost revives inflationary pressures, which could become evident by mid-2026. Already, inflation expectations have shown a flat to slightly up trend since October.
 

 

On the monetary front, Fed Chair Jerome Powell’s term ends in May and a replacement has not been named yet. The NY Times reported that federal prosecutors had opened a criminal inquiry into Powell over the Fed’s renovations of its Washington headquarters. Powell responded with a strongly worded statement that “the threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President”. The statement is a deviation from his previous position that the Fed does not factor political considerations into its rate decisions.

The blowback in Washington was immediate. While a number of Republicans came out in support of Fed independence, the most notable voice was Senator Thom Tillis, who is a member of the Senate Banking Committee that confirms the next Fed Chair. Tillis said, “I will oppose the confirmation of any nominee for the Fed — including the upcoming Fed Chair vacancy — until this legal matter is fully resolved.” The Republicans hold a 13–11 majority on the Senate Banking Committee. If the vote to advance the nomination of the next Fed Chair is along party lines and Tillis votes not to confirm, the vote will be tied and the nomination will not make it out of the Committee.

In addition, this incident raises the odds that Powell will stay on the Fed’s Board of Governors when his term ends in January 2028. This would complicate Trump’s efforts to sway the FOMC to his wishes. Under such circumstances, the only board seat available to the new Chair would be Stephan Miran’s, whose term ends in January, which doesn’t provide Trump with sufficient votes on the FOMC to decisively sway rate decisions.

Finally, the remainder of the year is littered with sudden bursts of geopolitical risk. Iran, Greenland and Venezuela are just some of the more obvious hotspots. In case you missed it, the U.S. Embassy issued a “do not travel” warning to Venezuela last week, citing “reports of groups of armed militias, known as colectivos, setting up roadblocks and searching vehicles for evidence of U.S. citizenship or support for the United States”. It’s the unstable political environment like this, along with unfavourable return profiles, that prompted Exxon to proclaim Venezuela to be “uninvestable”. Investor excitement over the flow of Venezuelan oil is likely to be met with disappointment in the coming months.

In conclusion, to everything there is a season, and early 2026 is a time for U.S. equity investors to reap the benefits of Trump’s 2025 policies. Investors are seeing falling risk premiums from fading policy uncertainty and the stimulative and pro-cyclical elements of the OBBB Act. However, the cost of the stimulative policies will begin to appear in late Q2 or early Q3, when geopolitical risk premiums may rise and become a headwind for risk assets.