With a new Republican-led White House and Congress, 2025 is set to bring shifts in U.S. government policy that may affect the economy and financial markets. Here are some of the top policy and regulatory actions to watch for, along with what it may mean for your investment portfolio.
7 Political Trends Investors Should Watch in 2025
Jan 21, 2025
Discover how the top policy changes coming out of Washington may affect the economy, markets and your portfolio.
Author
Monica Guerra, Head of Policy, Morgan Stanley Wealth Management
Author
Daniel Kohen, U.S. Policy Strategist, Morgan Stanley Wealth Management
Key Takeaways
- Most individual and corporate tax rules from the 2017 Tax Cuts and Jobs Act are likely to be extended; however, further corporate tax cuts may be difficult to achieve.
- While Congress is expected to raise the U.S. debt limit, concerns about the growing debt may slow GOP policy goals.
- Stiffer tariffs could dent stocks in U.S. industries where firms mainly manufacture goods overseas and depend on U.S. imports.
- Lower rates may boost the clean energy industry, while conflicting policy shifts could potentially hurt healthcare stocks.
- Restrictive immigration policies could reduce U.S. consumer spending and workforce availability, slowing growth.
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1Most Individual tax rules are likely to be extended
Key provisions from President Donald Trump’s 2017 Tax Cuts and Jobs Act affecting individuals are set to expire at the end of 2025, including changes to individual income tax rates, the standard deduction, personal exemptions, the alternative minimum tax and estate taxes. Should the provisions expire, it is estimated to increase taxes for approximately 62% of tax filers.
Investor implications: Tax policy will be a central element for the first year of President Trump’s agenda. Expect a unified Congress to extend most of the expiring provisions, with lawmakers potentially incorporating other tax breaks that may spur the economy. These could include an increase in (or even elimination of) the current $10,000 state and local tax (SALT) deduction cap as well as a time-limited tax holiday for tips and overtime.
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2Corporate tax cuts could be limited
During his first term, President Trump cut the corporate income tax rate from as high as 35% to a permanent 21% flat rate. While he has proposed lower rates, a swelling federal deficit and a potential need to offset other tax cuts may lead Congress to maintain the current 21% corporate tax rate.
Investor implications: Flat or rising corporate income taxes could disappoint financial markets hoping for a corporate tax cut. However, any possible tax increases would likely be limited, such as targeting U.S. multinational companies to incentivize them to “reshore” operations in the U.S.
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3Debt-ceiling debates may stall the GOP agenda
The government reached its federal debt limit of $36 trillion earlier this year, and will likely need to lift or suspend the debt ceiling in the next few months. Federal lawmakers have lifted or suspended the debt limit more than 20 times since 2002; thanks to unified control of Congress and the White House, the GOP should be able to raise the debt ceiling once again.
Investor implications: While we do not expect the U.S. to default on its debt, upcoming debt-ceiling negotiations may be entangled with lawmakers’ concerns about growing government debt and deficits, ultimately slowing the GOP’s progress on broader policy goals, such as tax reform. This could delay any potential economic benefit from such reforms while creating investor uncertainty.
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4Tariffs will likely add to stock-specific risk
During the 2024 campaign, President Trump proposed aggressive tariffs on Chinese, Canadian and Mexican goods. While we expect the proposal to be used as a negotiating tactic, if enacted the tariffs would likely increase U.S. inflation and negatively impact productivity.
Investor implications: Specific industries and sectors are particularly exposed to tariff risk, such as businesses that primarily manufacture goods overseas and depend on U.S. imports for revenue.
Even the threat of tariffs can impact stock prices. For example, a Morgan Stanley index of tariff-exposed stocks1 rallied based on former Vice President Harris’s solid debate performance last fall in anticipation of a Harris win and the continuation of current tariffs. However, the index immediately sold off after President Trump’s November electoral victory in anticipation of increased tariffs.
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5Clean energy may outperform traditional energy
While the new administration’s policies may create headwinds for the industry, roughly 80% of the funds obligated through the Inflation Reduction Act have benefited GOP-controlled states and districts, potentially reducing congressional willingness to unwind clean energy incentives. Not only that, but new policies that increase oil drilling could drive traditional energy prices downward amid already-elevated supply.
Investor implications: While it may sound counterintuitive, clean energy outperformed during President Trump’s first term, when rates were lower, while underperforming under President Biden, when rates were higher and geopolitical risks were elevated. With two Federal Reserve rate cuts expected in 2025, rate-sensitive clean energy stocks could get another boost.
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6Policy shifts may hurt the healthcare sector
Healthcare is likely to be a focal point for the incoming administration, with pharmaceuticals, managed care beneficiaries and other insurance companies negatively affected due to the potential for less-stringent vaccine mandates reducing demand, as well as for further weakening of the Affordable Care Act (ACA) and related subsidies.
Investor implications: These circumstances, along with greater scrutiny of pharmaceutical development and a stricter approval process from the FDA, could drag on pharmaceutical market performance. In addition, Congress is expected to let enhanced ACA subsidies expire at the end of 2025, which could significantly increase premium payments for some policyholders.
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7Immigration curbs could slow the economy
Restrictive immigration policies under the new administration may include more aggressive deportation plans, expansion of the border wall, increased funding for the Department of Homeland Security, elimination of programs like the Deferred Action for Childhood Arrivals (DACA) and reevaluation of visa and asylum seeker programs. Such changes could significantly reduce immigration as soon as mid-2025.
Investor implications: Fewer immigrants can mean fewer people buying goods and being available to work. For example, reinstatement of the “Remain in Mexico” policy for asylum seekers could reduce net migration from 1.1 million people to about 800,000 annually, according to Oxford Economics, causing GDP to fall by 0.5% in the first five years. Additional immigration restrictions could create a further drag on consumer spending and productivity, especially as the U.S. population ages and birth rates fall.
The Bottom Line
Ultimately, we expect a slower pace for Republican policy goals, such as broad tax cuts and swift budget negotiations, than what was promised on the campaign trail. Against a backdrop of rising geopolitical tensions, U.S. policies around tariffs, immigration and deregulation, could affect sectors like health care and energy. This could add greater uncertainty for investors in 2025.
Your Morgan Stanley Financial Advisor can help you stay informed about policy and geopolitical developments and their potential portfolio implications. To learn more, ask your Morgan Stanley Financial Advisor for a copy of the US Policy Pulse: 10 Policy Actions to Watch in 2025 report from Morgan Stanley’s Global Investment Office. Listen to the audiocast based on this report.
Footnotes:
1 The Morgan Stanley Institutional Equity Division Consumer Tariff Risk Index
Disclosures
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