Investing.com — Donald Trump’s return to the White House could bring heightened market instability in 2025, according to Piper Sandler, describing the economic environment as a “recipe for volatility.”
The investment bank draws comparisons to the early 1980s, suggesting that Trump’s return mirrors the conditions Reagan faced when he took office, inheriting inflationary pressures and policy dysfunction.
Piper Sandler points out that Trump would step into office following years of stimulative fiscal and monetary policies, much like Reagan. Federal spending has surged, inflation remains sticky, and bond markets are already reacting.
“Bond vigilantes” have begun driving yields higher, anticipating that the Federal Reserve’s recent rate cuts may have gone too far, too fast.
Federal outlays, which jumped 10.4% year-over-year in 2024, are continuing to fuel inflation, contrasting this with tariffs that act as a one-time tax rather than a persistent driver of price increases. The firm emphasizes that tariffs may “push related prices even higher,” but the inflationary impact pales in comparison to unchecked government spending.
Among the key factors that could drive market volatility in 2025 is the uncertainty surrounding fiscal policy under Trump. Federal spending patterns, the possibility of new tariffs, and questions about whether corporate taxes will remain low all add to market jitters. Piper Sandler warns that while potential deregulation and tax cuts could boost productivity, the immediate concern lies in how aggressively Trump might pursue tariffs, which could bleed consumer spending power and ripple through markets.
Monetary policy is another flashpoint, with inflation showing signs of persistence even as the Fed attempts to ease. Meanwhile, geopolitical risks—ranging from U.S.-China tensions to conflicts in the Middle East and Europe—further complicate the outlook.
“Jitters are already showing up in the data, with both the Empire and Phil Fed manufacturing expectation indices giving back some of their November election euphoria gains, ticking down in December,” Piper strategists note.
While the firm forecasts 2% GDP growth for 2025, it cautions that this will not be “a smooth ride.”
“There are big risks of volatility as Washington (hopefully) shifts to a more sustainable fiscal policy (slower outlays, less regulation, continued low taxes), and monetary policy (fewer rate cuts) trajectories, putting us in a position to see stronger potential GDP growth,” the note adds.
However, in the near term, strategists believe that the evolving policy landscape and fiscal uncertainty under Trump’s leadership will contribute to a volatile year ahead.
