If you ask many a Wall Street investor, tax cuts are poised for extension, deregulation is all but guaranteed, immigration reform for high-skill workers has real potential and President-elect Donald J. Trump’s Department of Government Efficiency (DOGE) might just cut the deficit.
Tariffs, by contrast, are a mere bargaining chip. Immigrant expulsions will probably be limited, and there is no way on earth that the incoming White House would meddle with the independent Federal Reserve.
Hope has been riding high in financial markets and corporate boardrooms in the month-and-change since the presidential election. But it is often predicated on a bet: Many of the optimists are choosing to believe that the Trump promises they want to see fulfilled are going to become reality, while dismissing those they think would be bad for the economy as mere posturing.
“A lot of people are using deductive reasoning and concluding that he’ll only do things that are good for the market,” said Julia Coronado, founder of the research firm MacroPolicy Perspectives. “They can ride this wave of hope-ium through the end of January,” she said, adding that much of it “feels delusional.”
There’s a reason for the hope: Many investors believe that markets themselves will act as a bulwark against extreme proposals.
Mr. Trump does care enormously about financial markets, and particularly the stock market. He points to it as a marker of success in a way that few if any presidents have ever done. And during his first term in office, he sometimes backed away from more extreme plans — like an idea to oust the Fed chair — when they caused markets to plummet.
That has convinced many investors that he will not do anything that roils the S&P 500, which is up more than 5 percent since the election. And those convictions have been reaffirmed by Mr. Trump’s recent appointment announcements: He is giving finance insiders prominent roles within his administration.
In particular, his pick of investor Scott Bessent to be the next Treasury secretary has been met with widespread relief, because Mr. Bessent is seen as an experienced player who understands how markets work and who would argue, at least behind the scenes, against measures that risk rankling them.
But the split screen, between belief in and dismissal of Mr. Trump’s promises, is a fragile one. If he does what Wall Street wants in all cases, he might renege on campaign promises. If he defies market logic and pursues the policies anyway, he risks roiling stocks.
In some ways, the divide resembles one during Mr. Trump’s first administration, when investors doubted that he would follow through on policy promises — often until he did.
No policy provides a clearer example than tariffs.
Mr. Trump has said there is no more “beautiful word” in the English language than tariffs, and has pledged to slap big ones on American trading partners during his second term. On Nov. 25, the president-elect surprised leaders in Canada and Mexico when he said in a social media post that he would put 25 percent tariffs on their goods unless they stopped drugs and migrants from coming into the United States. He has promised even bigger levies on China.
Tariffs of that magnitude could push up prices, damage economic growth, disrupt supply chains and bite into corporate profits. But Wall Street has barely blinked at the threats.
Edward Alden, a senior fellow at the Council on Foreign Relations, said that in “the benign, Wall Street version” of Mr. Trump’s plans, the White House would use tariffs as a negotiating tool without enacting them. Mr. Alden did not think that was correct.
“There’s no question he means it,” Mr. Alden said. “The first thing he said in his acceptance speech is: I will keep my promises. And that’s very much at the top of the promise list.”
Many on Wall Street see Mr. Bessent’s presence at Treasury as a deterrent against big tariffs. In a note to his clients nearly a year ago, Mr. Bessent said it was “unlikely” that across-the-board tariffs would be enacted at the same time that Mr. Trump made major moves on immigration.
“The tariff gun will always be loaded and on the table but rarely discharged,” he wrote.
But Mr. Trump likes to lead on trade policy himself — and he has recently been making that clear. A week before Mr. Trump picked him, Mr. Bessent wrote an opinion piece for Fox News praising tariffs, in what some saw as a demonstration of his loyalty to Mr. Trump’s trade plans.
“We should not be afraid to use the power of tariffs to improve the livelihoods of American families and businesses,” he wrote.
Trade is just one arena where Wall Street is hearing what it wants to from Mr. Trump. Another is the government’s deficit.
While investors are attentive to the risk that the deficit could continue to grow after ballooning in recent years, a few have begun to express optimism that Mr. Trump could cut costs and narrow the gap between what the United States spends and what it takes in through taxes and other revenue. He has assigned the task of finding places to cut spending to Elon Musk, the Tesla chief executive, and Vivek Ramaswamy, the entrepreneur and former presidential candidate.
“A lot of people have difficulty separating out their preconceived views of Elon Musk: If you think he’s the best, you think he’s going to be successful,” said Thomas Simons, chief U.S. economist at Jefferies, while others view him as a “charlatan” who will fail.
“The average is wait-and-see,” Mr. Simons said, because cutting federal spending to the degree necessary to bring down the deficit is hard, but onlookers have learned to “never underestimate Elon.”
Others have taken a more tempered view.
“There is a growing perception that federal outlays will be reined in significantly under the incoming administration, but we’re not fully buying into all the tough talk,” an Oxford Economics analyst, Bernard Yaros, wrote in a recent note.
While Mr. Bessent has called for cutting the budget deficit to 3 percent of gross domestic product by the end of Mr. Trump’s second term, Mr. Yaros wrote that his base-line forecast was more than 6 percent during the next four years, roughly in line with where it currently sits.
Mr. Trump has promised to protect Social Security and Medicare, which together make up a third of federal spending. And during his first term, he requested more funding for the Departments of Defense, Veterans Affairs and Homeland Security.
“Two-thirds of federal spending would be off limits,” Mr. Yaros wrote. “Massive cuts to the remaining third of the budget would be a tough sell for members of Congress.”
Finally, Wall Street is taking for granted that the Trump White House is not going to try to reshape the independent Fed.
Apolitical central banks are the gold standard internationally, because they are capable of making hard short-term choices, like keeping rates high, that keep inflation in check over the longer term. Given that, people in Mr. Trump’s orbit have stressed that hurting the Fed’s independence could send stocks into a tailspin.
There’s reason to believe that investors are right to think that Mr. Trump will leave the Fed alone: He has already signaled that he is not going to fire Jerome H. Powell, the Fed chair.
But he waged a nonstop verbal pressure campaign on the Fed during his first term and tried to appoint loyalists to its seven-member board in Washington — a playbook that he could return to.
The uncertainty over which policy promises Mr. Trump will fulfill is also creating an uncertain backdrop for the Fed’s own policy.
Fed officials are widely expected to cut interest rates at their meeting this week, but they will also have to forecast what policy might look like next year. That could look very different depending on how White House policy — and thus the broader economy — shapes up.
“The proof will have to be in the pudding,” said Gennadiy Goldberg, a rates strategist at TD Securities, explaining that markets might continue to soar until tariffs seem real or the economy itself takes a hit. “The market is very excited about all of the good aspects of a Trump presidency, and is discounting the bad aspects.”
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