Political Risk and Executive Power in U.S. Equity Markets: Navigating Trump’s Second-Term Dynamics

The U.S. equity market has entered a new era of volatility and uncertainty under President Donald Trump’s second term, driven by a confluence of expanded executive power, aggressive trade policies, and institutional tensions. While the S&P 500 has remained near record highs, the path to these levels has been marked by sharp corrections, policy-driven uncertainty, and a redefinition of the relationship between political risk and market performance. Investors now face a landscape where traditional metrics of stability are increasingly challenged by a president who has weaponized executive authority to reshape economic and regulatory norms.

Executive Power and Market Volatility

President Trump’s second term has been defined by a bold expansion of executive power, including attempts to remove Federal Reserve Board members and deploy military forces to urban centers. These actions, as noted by a report from Markets.com, have tested the boundaries of presidential authority and raised concerns about the erosion of institutional checks and balances [1]. Such moves have coincided with heightened political risk, as measured by the Presidential Uncertainty and Risk (PUR) index, which spikes during events like presidential debates and military escalations [4]. According to a study published in ScienceDirect, these spikes correlate with a 21.3 basis point decline in abnormal stock returns, underscoring the tangible financial cost of political unpredictability [4].

The Federal Reserve’s 2025 stress test scenarios further highlight the risks of policy uncertainty. The central bank warned that severe economic downturns—potentially exacerbated by Trump’s trade policies—could amplify market volatility and erode investor confidence [2]. This tension between executive overreach and monetary policy independence has created a fragile equilibrium, with the Fed now navigating a stagflationary environment driven by tariffs and inflationary pressures [5].

Tariffs and the “Wall of Worry”

At the heart of Trump’s economic strategy lies a sweeping tariff regime. By August 2025, the U.S. effective tariff rate had risen to 15.8%, with sector-specific tariffs projected to push it toward 18–20% by year-end [1]. These policies, justified under the International Emergency Economic Powers Act (IEEPA), have triggered retaliatory measures from China, Canada, and the EU, affecting $330 billion in U.S. exports [6]. While J.P. Morgan Global Research noted that gradual tariff implementation has softened global growth impacts, the uncertainty surrounding future adjustments—particularly in pharmaceuticals and electronics—continues to weigh on investor sentiment [1].

The market’s response has been a classic “wall of worry.” The S&P 500 initially fell 10% following the April 2025 “Liberation Day” tariff announcement but rebounded 24.5% by September 2025, buoyed by the July tax-cut legislation and strong corporate earnings [2]. However, this resilience masks deeper structural risks. A report by the Tax Foundation estimated that Trump’s tariffs could reduce U.S. GDP by 6% and wages by 5% over the long term, with middle-income households facing a $22,000 lifetime loss [4]. These economic headwinds, combined with the Federal Reserve’s constrained policy flexibility, suggest a prolonged period of asymmetric risk for investors.

The DOGE Initiative and Institutional Erosion

Trump’s creation of the Department of Government Efficiency (DOGE), led by Elon Musk and Vivek Ramaswamy, has further complicated the investment landscape. The initiative, which aims to cut federal spending by 95%, has raised concerns about regulatory instability and conflicts of interest. Musk’s $270 million in donations to pro-Trump super PACs, for instance, has fueled questions about whether DOGE’s policies will favor specific donors or industries [6]. This erosion of institutional trust, as highlighted by the Brennan Center for Justice, could dampen long-term investment and hiring decisions, particularly in sectors reliant on stable regulatory frameworks [4].

Global Implications and Investor Strategy

The Trump administration’s policies have also reshaped global markets. The EIU’s Trump Risk Index, which assesses the impact of U.S. trade and immigration policies on major trading partners, underscores the interconnected nature of these risks. For example, the U.S.-Japan trade deal—capping tariffs at 15%—has provided a tailwind for Japanese equities, while retaliatory tariffs from the EU have pressured European exporters [1]. In this environment, investors are increasingly favoring defensive assets like gold and low-volatility equities, as noted by Invesco’s Global Market Strategy Office [3].

For U.S. equity investors, the path forward requires a nuanced approach. While the S&P 500 has historically delivered positive returns during presidential terms, the current climate demands a focus on diversification and hedging against volatility. The Q3 2025 market rebound, driven by trade negotiations and weaker dollar dynamics, illustrates the potential for resilience—but also the fragility of optimism in the face of unresolved legal challenges to IEEPA tariffs and ongoing geopolitical tensions [2].

Conclusion

President Trump’s second term has redefined the interplay between political risk and equity markets. The expansion of executive power, coupled with protectionist trade policies and institutional tensions, has created a landscape where volatility is the new normal. Investors must now balance the short-term tailwinds of tax cuts and corporate earnings with the long-term risks of economic fragmentation and regulatory instability. As the PUR index and market corrections suggest, the ability to navigate this terrain will depend on agility, diversification, and a willingness to confront the uncomfortable truth that political risk is no longer a peripheral concern—it is the central driver of market dynamics.

Source:
[1] Stock Market Under the Trump Administration [https://www.usbank.com/investing/financial-perspectives/market-news/stock-market-under-trump.html]
[2] 2025 Q3 Market Outlook: Global Tailwinds in a World of ... [https://www.fiduciary-trust.com/insights/market-outlook/]
[3] Tariffs and trade wars: What do they mean for investors? [https://www.invesco.com/us/en/insights/tariffs-trade-wars-what-do-they-mean-for-investors.html]
[4] The Economic Effects of President Trump's Tariffs [https://budgetmodel.wharton.upenn.edu/issues/2025/4/10/economic-effects-of-president-trumps-tariffs]
[5] An Investor's Guide To Potential U.S. Policy Changes In 2025 [https://russellinvestments.com/cn/blog/potential-policy-changes-us-2025]
[6] US Tariffs: What's the Impact? | J.P. Morgan Global Research [https://www.jpmorgan.com/insights/global-research/current-events/us-tariffs]