The Political Volatility Risk in U.S. Equity Markets Under Trump’s Second Term

President Donald Trump’s retribution-driven governance has injected unprecedented uncertainty into U.S. equity markets, with tariffs, regulatory shifts, and political rhetoric creating a volatile landscape for investors. Since the start of his second term, the S&P 500 has experienced dramatic swings, including a 20% drop within seven weeks in early 2025 following a major tariff announcement, only to rebound nearly 30% by late August 2025 [1]. This volatility underscores the dual-edged nature of Trump’s policies: while corporate earnings and tax cuts have buoyed long-term optimism, the short-term turbulence has left investors grappling with sector-specific risks and geopolitical uncertainties.

Legal and Policy Uncertainty: A Double-Edged Sword

Trump’s reliance on the International Emergency Economic Powers Act (IEEPA) and Section 232 of the Trade Expansion Act to justify tariffs has sparked legal challenges and regulatory ambiguity. A federal appeals court recently ruled that IEEPA does not support broad-based import tariffs, forcing the administration to pause most tariffs for 90 days [3]. This legal back-and-forth has compounded economic costs, with the Penn Wharton Budget Model estimating a 6% reduction in long-run U.S. GDP and a $22,000 lifetime income loss for middle-class households [3]. Meanwhile, the administration’s aggressive tariff hikes—such as 50% on Brazilian goods and 35% on Canadian goods—have raised inflationary pressures, though current CPI data remains muted [1].

The politicization of key economic institutions further exacerbates uncertainty. The firing of Bureau of Labor Statistics commissioner Erika McEntarfer and ongoing criticism of Federal Reserve Chair Jerome Powell have fueled fears of interference in monetary policy [5]. Speculation about replacing Powell before his 2026 term end has added to market jitters, with the American Association of Individual Investors reporting 61% of investors expecting a market decline in the next six months [6].

Sector-Specific Volatility: Winners and Losers

Trump’s tariffs have disproportionately impacted industries reliant on global supply chains. The energy sector, for instance, faces steep costs from 50% tariffs on steel and aluminum, which have increased equipment and construction expenses for oil, gas, and renewable energy projects [1]. Renewable energy companies are particularly vulnerable, with tariffs of 65% on grid batteries and 14% on solar modules threatening to raise development costs [5]. Similarly, the metals and mining sector has seen copper prices plummet to $9,100/metric ton on the London Metal Exchange in Q3 2025 due to a 50% U.S. tariff [1].

Manufacturing and technology sectors have also been hit hard. Tariffs on pharmaceuticals and semiconductors initially spiked to 250% and 100%, respectively, before being reduced to 5%, creating a climate of uncertainty that forced companies to hedge against supply chain risks [2]. Japanese automakers, for example, have expressed concerns about U.S. tariffs reducing demand for their vehicles and disrupting component supply chains [3]. Meanwhile, property and casualty insurers face higher loss costs as tariffs inflate building material and auto part prices, potentially leading to premium hikes [4].

Investor Confidence: A Fragile Optimism

Despite these challenges, the S&P 500 has shown resilience, posting a 1.58% annualized return since the start of Trump’s second term [3]. This resilience is attributed to strong corporate earnings and tax-cut legislation, which have offset some economic uncertainties [6]. However, investor confidence remains fragile. Goldman Sachs notes that U.S. businesses initially absorbed 64% of tariff costs in early 2025, but this burden is shifting to consumers, as evidenced by a sharp July producer price index increase [2].

The expiration of the U.S.-China tariff truce in August 2025 has reintroduced risks of renewed trade tensions, while the U.S.-EU preliminary trade deal—setting a 15% baseline tariff on European goods—has provided temporary stability [6]. Yet, the broader market reaction to tariff announcements has been tempered by the Federal Reserve’s reluctance to cut interest rates, despite rising inflationary pressures [6].

Conclusion: Navigating the Uncertainty

Trump’s retribution-driven policies have created a paradoxical market environment: one where long-term optimism coexists with short-term volatility. For investors, the key challenge lies in balancing exposure to resilient sectors—such as technology and healthcare—with hedging against risks in vulnerable industries like energy and manufacturing. As the administration continues to leverage tariffs as a political tool, the interplay between legal challenges, global trade agreements, and corporate adaptability will remain critical to market stability. In this climate, diversification, scenario planning, and a focus on inflation-linked assets may offer the best path forward.

Source:
[1] Stock Market Under the Trump Administration, [https://www.usbank.com/investing/financial-perspectives/market-news/stock-market-under-trump.html]
[2] Political Risk and Market Volatility: How Legal Scandals Shape Investor Behavior 2025, [https://www.ainvest.com/news/political-risk-market-volatility-legal-scandals-shape-investor-behavior-2025-2508/]
[3] The Economic Effects of President Trump's Tariffs, [https://budgetmodel.wharton.upenn.edu/issues/2025/4/10/economic-effects-of-president-trumps-tariffs]
[4] S&P webinar: Trump tariffs create market volatility, uncertainty across sectors, [https://www.spglobal.com/market-intelligence/en/news-insights/articles/2025/5/sp-webinar-trump-tariffs-create-market-volatility-uncertainty-across-sectors-88777200]
[5] Trump's Pressure on Fed Is Just the Latest US Policy, [https://www.morningstar.com/economy/trumps-pressure-fed-is-just-latest-us-policy-concern-global-investors]
[6] The Potential Portfolio Impact of Trump Policies & Tariffs, [https://www.ishares.com/us/insights/trump-policies-and-tariffs]