Even by Washington standards, the second Trump presidency has begun in frenetic fashion: mass firings at federal agencies, tariff threats against allies and foes alike, and haggling over how to get a Republican budget through a narrowly divided Congress.
Business leaders and corporate investors are confident that things will turn out fine, at least for them. “Markets aren’t showing all that much concern,” Jason Pride, chief of investment strategy and research at the Glenmede Trust Company, noted.
But that could change, with high-stakes implications for the markets and the U.S. economic outlook.
Investors fully expect the tax cuts from President Trump’s first term, which mostly benefited businesses and the wealthy, to be fully extended before the end of the year. Trade groups including the Business Roundtable and the National Association of Wholesaler-Distributors are confident the extension will be taken care of — especially since not doing so “would impose, effectively, a tax increase,” Mr. Pride added.
Still, the arithmetic remains tenuous. The cost of extending the tax cuts may total $4 trillion over 10 years. That means Congress is being left to barter over what else can save or raise money, and whose federal benefits might be cut.
The bond market — where traders price the risk of both inflation and an economic downturn — has, for its part, shimmied off moments of worry brought on by Mr. Trump’s boomeranging style of negotiation over tariffs. The bet is that the threats of an import tax are more a geopolitical tool than a key revenue raiser, as the administration has portrayed the tariffs in budget discussions.
Some of the underlying calm stems from Wall Street’s confidence in Treasury Secretary Scott Bessent. A billionaire hedge fund manager before assuming his new position, he has convinced many analysts that the ultimate suite of policies coming from the White House will be beneficial once it coalesces, and he “has also added to some optimism around lower deficits” in future budgets, according to Matt Luzzetti, the chief economist at Deutsche Bank.
That optimism is hard to square with Mr. Bessent’s goal of making Mr. Trump’s 2017 tax cuts permanent and Mr. Trump’s declaration in recent days that social insurance programs that many in his political base rely upon — including Social Security, Medicare and Medicaid — should not be cut as part of any cost-saving measure.
Several Republican legislators, including Senator Josh Hawley of Missouri, and eight House members, have echoed that stand. Some others want more spending cuts on the table. With a Republican majority of just a few votes in each chamber of Congress, however, it is unclear which legislative proposals will ultimately take priority.
Plenty of early buzz around saving costs has centered on the Department of Government Efficiency, or DOGE, the initiative led by Elon Musk to reshape the federal bureaucracy.
For many in the business world, including a co-founder of Airbnb and the chief executive of Palantir, Mr. Musk’s cost-cutting campaign offers the prospect that previously unearthed sources of large-scale waste and fraud, once excavated, could help pay for tax cuts in future budget calculations.
Mr. Trump and Mr. Musk have said the cost-cutting effort could save trillions. But a New York Times analysis of the $55 billion in savings claimed by DOGE found that the math is marred with accounting errors, incorrect assumptions, outdated data and other mistakes.
“With over 90 percent of government outlays falling in the categories of nondiscretionary, interest and defense spending, options to reduce the deficit materially, without increasing taxes, are quite limited,” said David Rogal, a lead portfolio manager at BlackRock.
Several analysts at conservative think tanks have criticized Mr. Musk as misleading both voters and businesspeople about where the bulk of federal expenditures lie.
“Unless you are focusing chiefly” on the vast majority of the budget “spent on Social Security, Medicare, Medicaid, defense, veterans and interest payments to bondholders, you should not be taken seriously as a spending-focused deficit hawk,” said Jessica Riedl, a senior fellow at the right-leaning Manhattan Institute. “Sure, trim the rest, but the real money is in those.”
Mr. Pride of Glenmede said letting tax cuts expire this year could dampen economic growth. But he also said “Option 2” for Mr. Trump and Mr. Bessent — significant budget cuts — would “have a similar economic impact, via different channels, because the government spends directly into the economy.”
Putting aside potential impacts to households’ health care and food security, many economists believe the hundreds of billions of dollars in spending cuts being proposed by some members of Congress — paired with hefty layoffs of the federal work force — could slow job growth and retail sales.
Business community groups have argued for decades that federal budget deficits can and should be addressed through reduced spending, rather than greater tax revenue.
What’s new is that as the population ages, mandatory spending on old-age insurance has soared. The military budget and federal interest payments to bondholders also continue to grow.
On the campaign trail, Mr. Trump made a series of populist tax promises to voters. Pledges to stop taxing tips or overtime pay, to lower taxes for firms that make their products domestically and to eliminate taxes on Social Security payments garnered a wave of popular support. But those initiatives — which would collectively reduce tax revenue by about $1 trillion — appear to be falling off the priority list of many in Congress.
The White House and its allies “have a lot of spending and tax reduction ideas and very few plausible, non-gimmicky pay-fors,” said Stan Veuger, an economist and senior fellow at the right-leaning American Enterprise Institute.
Kim Wallace, a senior managing director at the investment strategy firm 22V Research who heads the Washington policy risk team, said he feared that “at the end of this process, whether it’s June or December, there’s going to be some fudging of the numbers and then there is going to be a confrontation between proponents of fudging numbers” in Congress and experts at the nonpartisan committees in Congress that formally “score” revenue and spending.
Such a confrontation could spook markets. But from notes shared with clients and financial chatter on television, a vast majority of economists, government affairs analysts and wealth managers on Wall Street believe that the budgetary math will be figured out.
“It will be difficult to satisfy the various objectives of the administration — lower deficits, lower taxes and strong growth — through these policies,” Mr. Luzzetti of Deutsche Bank said. “One approach, which I think is most likely, is to shorten the timeline for tax cuts.”
That, he said, “will mean more tax cuts legislated in the near term, but a smaller sticker price” than the usual 10-year horizon used to pass budgets with slim majorities.
This would be done with an expectation from corporate America that the tax cuts would not expire but would be extended again in later years, adding to deficits.
Markets, however, remain most focused on medium-term inflation and, in turn, the path of interest rates. Traditionally, economists and business leaders view tariffs as inflationary, since businesses typically seek to pass the cost of the tax on to consumers.
Mr. Bessent, though, has expressed confidence that inflation expectations will remain tame and that when certain tariffs are enacted, they will spur a “one-time shift in the price level,” and not continue to drive inflation — an idea supported by a key Federal Reserve official.
Mr. Trump’s recently announced plan for “reciprocal” tariffs against all trading partners — along with levies on steel and aluminum imports and unresolved threats against Canada and Mexico — may still disorient global trade.
But bond investors appeared reassured by the lack of detail in the pronouncement. And the president indicated that reciprocal measures wouldn’t be enacted before early April.
