Beyond the Trump Trade: US Equity Investing in a New Policy Era

Subsidies provided by the Inflation Reduction Act (IRA) of 2022—a key policy move of President Joe Biden—are likely to be targeted by Trump. IRA incentives for electric vehicles (EV) and renewable energy are considered particularly vulnerable, given the new government’s stated support of fossil fuel production and criticism of environmental initiatives. While the EV subsidies may indeed be at risk, we think repealing renewable energy subsidies will be much harder to do because many sustainable infrastructure projects have created jobs in Republican states.

The IRA isn’t the only subsidy framework to watch. In fact, the Infrastructure Investment and Jobs Act (IIJA) of 2021 is three times larger than the IRA. The IIJA’s $1.2 trillion of stimulus supports a range of projects including transportation, water, energy and environmental initiatives—and only about a sixth has been released so far. Our research task as investors is to differentiate between subsidies at greater risk of being cut off and those more likely to survive.

For example, investing in critical physical infrastructure is an area of bipartisan agreement that largely transcends the US election. Deglobalization (or multishoring) is leading to manufacturing and related infrastructure (power, water, transportation) investment to support industrial development. An administration focused on accelerating domestic economic activity, by definition, will also support accelerated infrastructure investment. We believe that broad support to invest in US infrastructure could create opportunities for select companies to benefit disproportionately.

Similarly, the bipartisan CHIPS Act—aimed at strengthening the US semiconductor industry—is likely to remain mostly intact, in our view. Passed in 2022 with bipartisan support, the subsidies in this legislation are widely seen as vital to reduce US dependence on overseas technology that is considered vital to national security.

Broadly speaking, companies whose earnings depend on at-risk subsidies must be reassessed critically. In other cases, we may find opportunities in companies with solid businesses that are incorrectly perceived as being susceptible to subsidy cuts. 

Trump has pledged to maintain the corporate tax rate at 21%, as per the Tax Cuts and Jobs Act of 2017. During the campaign, he also proposed potential further conditional tax cuts to 15%. Low corporate taxes may boost earnings across the board. But investors should be aware of the risks of assuming that an earnings lift from lower tax rates will support long-term profitability and equity outperformance.

Lower-quality or commodity businesses (like banking) often pass on to customers the margin pickup from lower tax rates by reducing prices. In contrast, higher-quality businesses enjoy advantages that should be accentuated in a low-tax environment. Since these companies often have strong pricing power, they can retain a tax windfall for reinvestment rather than pass it on to customers, which reinforces earnings growth potential and return power. Investors shouldn’t be seduced by a tax-induced earnings jump, but rather maintain focus on business features that support long-term return potential.

During the campaign, Trump promised to make tariffs a central component of his trade policy. On November 25, the president-elect said that after taking office, he will issue an executive order imposing a 25% tariff on all imports from Canada and Mexico, as well as an additional 10% tariff on China. If implemented, new tariffs could incentivize American companies with overseas operations to bring production back to the US. But the impact will not always be straightforward—US manufacturers that rely on parts produced overseas could face new cost challenges if immediate domestic solutions aren’t available. These dynamics present big research questions.

Even before details are known, investors and analysts can evaluate a company’s geographic and product exposure to tariffs, to inform an appropriate response. That doesn’t only mean selling down positions at risk; in some cases, we might take advantage of temporary dislocations triggered by the headlines in companies that look likely to benefit from changing price dynamics. We can also study how individual companies managed tariff risk during Trump’s first presidency and whether their supply chain resiliency has grown since COVID. Some companies are better prepared for the changes to come, which should be reflected in their risk/reward equation.

Trade wars and tariffs widen the range of potential outcomes for companies and investors. If the risks are too severe, investors should step out of the way and avoid an industry or a company that’s in the direct line of fire of unpredictable trade moves.

If a company is vulnerable to tariffs but has an otherwise solid business, we can apply suitable discount rates that reflect a risk-aware valuation. Then, we can gauge whether the long-term reward potential compensates for those risks. Position sizes in a portfolio can also be adjusted to reflect a company’s susceptibility to tariff moves.

Regulation—and deregulation—require attention in many sectors. But the outcome of regulatory change isn’t always one-dimensional. For example, if regulations on fossil fuel exploration and production are eased, that doesn’t mean renewable energy companies are doomed. In our view, renewable energy initiatives are driven primarily by improving economics rather than regulation, so companies in these industries must be analyzed on a case-by-case basis. In some cases, shares of resilient renewable energy companies may be punished over fears of unfavorable regulation, creating buying opportunities.

Looser regulatory scrutiny could remove an overhang for some mega-cap technology stocks as well as the largest US banks, and may fuel a pickup in M&A activity.

Investors must keep an eye on appointees to key positions in the Department of Justice, the Federal Trade Commission and health agencies, to start understanding how regulatory change might unfold. Robert F. Kennedy’s nomination for Secretary of Health and Human Services has raised questions about the healthcare sector, given his outspoken positions on issues such as vaccines and big pharma companies. His appointment may not be confirmed by the Senate. However, if he is appointed, investors must reassess the impact to diverse companies across the healthcare sector—from medical technology to drugmakers. As a rule of thumb, if radical regulatory change is coming, it's imperative to focus on healthcare companies with explicit business advantages that should persist, come what may.

Deregulation is a powerful force that can be a game changer for companies in diverse industries. Deciphering the potential impact of deregulation on businesses requires industry expertise and favors active management, which allows investors to position appropriately in potential winners and reduce exposure to likely losers.