Policy Power Plays: What’s Really Moving U.S. Markets This Year
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Introduction
The second half of our Policy Digest takes a closer look at how Washington’s decisions, rather than corporate fundamentals, are setting the tone for U.S. markets in 2025. Since Donald Trump’s return to office, markets have moved not on data or earnings reports but on policy headlines from tariffs to tax reform; immigration shifts to energy rollbacks. With a federal shutdown halting official statistics, investors are increasingly turning to private indicators and political signals to gauge the state of the economy. Every new measure, whether it involves fiscal relief, import tariffs, or deregulation, is influencing liquidity, inflation, and interest rate expectations in real time. As a result, markets today are operating in a uniquely policy-driven environment, where sentiment and sector performance hinge more on Washington’s next move than Wall Street’s next earnings call.
Last week we released the first half of this Digest. Why is this topic so important for markets right now?
Policy, not just earnings, is driving 2025 market behavior. Investors are now evaluating what Washington can realistically deliver versus what remains political rhetoric. With the ongoing federal shutdown halting the release of official economic data, market sentiment is being shaped largely by private indicators and policy developments. Every action from tariffs to tax relief has immediate implications for liquidity, inflation, and rate expectations.
Since Trump’s return to office, the S&P 500 has swung nearly 38 percentage points, dropping almost 10% in April during the tariff shock before rebounding 28% by late summer. This marks the widest policy-driven trading range since 2018 and underscores how politics, rather than fundamentals, have defined market momentum throughout 2025.
We focused heavily on immigration and tariffs last week. Can you remind our audience why those areas are so central to the current market environment?
Both tariffs and immigration directly affect the supply side of the U.S. economy goods and labor. Tariffs raise import costs, benefiting domestic producers but pushing up inflation. Immigration policy, meanwhile, alters labor supply and wage growth, which has a direct impact on corporate margins and hiring decisions.
Together, these two areas shape inflation expectations and, by extension, the Federal Reserve’s approach to interest rates. The April 2025 tariff package triggered the largest two-day market loss in U.S. history, wiping out $6.6 trillion in equity value. Yet by May, as tariffs were paused and fiscal relief arrived, the S&P 500 fully recovered. This dramatic reversal demonstrates how closely market performance is tied to the Trump administration’s policy rhythm rather than to broader macroeconomic fundamentals.
So, what remains on the table in the second half of this policy review?
The second half of this review focuses on the policies influencing long-term capital flows and sector leadership. These include energy and environmental deregulation, tax reform, and adjustments to retirement accounts and ESG-related rules. While these topics may not command the same headlines as tariffs or immigration, their long-term effects are far-reaching shaping financing costs, profitability, and investor behavior.
Together, these policy domains govern more than $40 trillion in U.S. capital markets. Energy deregulation influences cost structures across industrial sectors; tax reform impacts corporate earnings potential, and retirement rule changes determine how household savings are allocated. Even minor adjustments can redirect hundreds of billions in capital, shifting the balance of market power between sectors.
Why should investors care about these particular areas right now?
Investors should pay attention to these policy areas because they will define the next phase of market leadership. Energy deregulation, for instance, could extend the rally in oil, gas, and industrials, while slowing momentum in clean energy. Tax relief may sustain consumption and corporate earnings in the short term but heighten fiscal risks, keeping long-term yields volatile.
Changes in retirement and ESG policies will also affect where institutional capital especially 401(k) and pension assets, is allocated. The combined influence of these shifts will determine whether the 2025 rally transforms into a sustained bull market or fades under the pressure of fiscal deficits. Since Trump froze EV targets and canceled $5 billion in charging grants, fossil fuel producers have gained 15%, while clean-energy ETFs have fallen 12% in Q3 2025. This divergence shows how regulatory direction alone can reshape sector performance even before fundamentals catch up.
And in aggregate, how much of the Trump agenda is still left to be implemented from a policy standpoint?
A significant portion of the Trump agenda remains incomplete. Key priorities such as revoking China’s PNTR status, completing the border wall, and passing a formal industrial policy are either pending or tied up in court. So far, markets have priced in partial progress rather than full execution, leaving room for both upside potential if these policies advance and downside risk if they stall.
Historically, Trump fulfilled only 23% of his first-term campaign promises, compared with 47% under Obama. The current follow-through rate appears similar, suggesting that investors should brace for continued policy volatility and headline-driven market rotations into 2026. Implementation remains the biggest variable and the greatest source of market uncertainty.
Conclusion
As 2025 unfolds, one thing is clear: U.S. markets are being led by policy, not performance. The interplay between fiscal decisions, regulatory shifts, and investor sentiment has created a trading environment unlike any seen in recent years. An announcement from Washington whether tariffs, energy deregulation, or tax relief ripples instantly through capital markets, driving volatility and influencing where money flows. For investors, this means that traditional metrics like earnings growth or valuation may matter less than understanding the policy landscape itself.
However, the policy narrative is not the only story. The AI trend continues to be a major, non-political force driving the market. Experts note that AI is expected to deliver meaningful productivity gains and increased profits for major corporations. This powerful technological shift provides a strong counterweight to political uncertainty, and its ability to significantly boost earnings potential may allow the market's current bull to run, regardless of Washington's next move.
Ultimately, the second half of Trump’s term will determine whether America’s policy-driven rally, supported by technological tailwinds, can evolve into a durable bull market or whether political uncertainty continues to dominate the narrative. Either way, in 2025, successful investing requires not only reading the markets but reading Washington and Silicon Valley just as closely.
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