Geopolitical Risk and Market Volatility: The Role of Executive Actions in Shaping Investor Behavior

In an era marked by escalating geopolitical tensions and shifting executive priorities, the interplay between domestic security policies and global market dynamics has become a critical factor for investors. Recent U.S. executive actions—ranging from outbound investment restrictions to federalized law enforcement initiatives—have not only reshaped national security frameworks but also introduced new layers of uncertainty into financial markets. This analysis explores how these policies influence investor sentiment and sector performance, drawing on empirical data and regulatory developments from 2023 to 2025.

Executive Actions and Investor Sentiment: A Dual-Edged Sword

The Biden and Trump administrations have leveraged executive authority to address domestic security challenges, with mixed implications for market confidence. For instance, Executive Order 14105, finalized in January 2025, imposed stringent restrictions on U.S. investments in sensitive technologies like semiconductors and AI in "countries of concern," primarily ChinaThe Economic Effects of President Trump’s Tariffs^[1]. According to a report by the U.S. Department of the Treasury, the regulations require U.S. persons to conduct exhaustive due diligence on both direct and indirect investments, including those in non-Chinese entities with significant ties to Chinese operationsFinal outbound investment rule released | Davis Polk^[2]. This has created compliance burdens, particularly in the AI sector, where the distinction between prohibited and notifiable transactions adds operational complexityFinal US Regulations on Outbound Foreign Investment: Key…^[5].

The immediate effect has been a recalibration of investor behavior. Data from Bloomberg indicates that the Information Technology sector, a bellwether for tech-driven economies, posted a 14.6% annual return as of August 2025 but faces headwinds from regulatory uncertaintyMonthly Stock Sector Outlook (2025)^[3]. Investors are increasingly cautious, with some redirecting capital to sectors perceived as less exposed to geopolitical risks, such as Utilities and Energy, which saw modest gains of 0.99% and 0.47% in September 2025Declaring a National Emergency Unlocks the President’s Emergency Powers^[4].

Conversely, Executive Order 14289, which streamlined overlapping tariffs on imported goods, aimed to stabilize market expectations by preventing excessive cumulative dutiesAddressing Certain Tariffs on Imported Articles - Federal Register^[6]. However, the broader tariff policy introduced in April 2025—projected to reduce GDP by 6% and wages by 5% over the long term—has introduced volatilityThe Economic Effects of President Trump’s Tariffs^[1]. As noted by the Wharton Budget Model, the economic policy uncertainty index surged to pandemic-era levels, prompting firms to delay investments and hiring decisionsThe Economic Effects of President Trump’s Tariffs^[1]. This duality—regulatory clarity in some areas and heightened uncertainty in others—has created a fragmented landscape for investors.

Sector Performance: Winners and Losers in a Polarized Market

The impact of executive actions on sector performance is starkly evident in the S&P 500's mixed results. Charles Schwab's 2025 sector outlook highlights Communication Services as the top-performing sector, with a 20.9% gain over the trailing 12 monthsMonthly Stock Sector Outlook (2025)^[3]. This resilience may reflect the sector's alignment with domestic infrastructure priorities, such as 5G expansion and cybersecurity investments. In contrast, the Energy sector has underperformed, declining by 13.0% over the same period, partly due to supply chain disruptions exacerbated by global trade tensionsMonthly Stock Sector Outlook (2025)^[3].

The DC Crime Emergency declaration under President Trump in August 2025 further illustrates the intersection of security policies and market dynamics. While the surge in federal law enforcement led to a 39% drop in violent crime and an 87% reduction in carjackingsFinal outbound investment rule released | Davis Polk^[2], it also raised legal questions about federal overreach. Sectors tied to federal operations, such as real estate and transportation, may benefit from a safer environment, but prolonged uncertainty could deter long-term investment. For example, real estate developers in D.C. face ambiguity about zoning regulations and public infrastructure funding, which could delay projectsDeclaring a National Emergency Unlocks the President’s Emergency Powers^[4].

Strategic Implications for Investors

The cumulative effect of these executive actions underscores the need for investors to adopt a nuanced approach. Sectors with strong regulatory tailwinds—such as defense, cybersecurity, and domestic manufacturing—appear well-positioned to capitalize on policy-driven demand. Conversely, industries reliant on global supply chains, including semiconductors and energy, face elevated risks from trade restrictions and geopolitical friction.

Conclusion

Geopolitical risk remains a dominant force in shaping market outcomes, with executive actions serving as both catalysts and constraints. While policies like EO 14105 aim to protect national security, they also introduce compliance costs and investor hesitancy. Similarly, federalized law enforcement initiatives may yield short-term security gains but risk long-term market instability. For investors, the path forward lies in balancing strategic alignment with policy trends while hedging against regulatory volatility.