Trump's Return and Its Impact on U.S. Equities: Sector Rotation and Market Positioning for the 2025–2026 Cycle

The return of Donald Trump to the White House has ignited a seismic shift in U.S. equity market dynamics, with sector rotation and positioning strategies recalibrating to align with his 2025–2026 economic agenda. Characterized by aggressive tariff hikes, deregulation, and tax cuts, Trump's policies are reshaping investor sentiment and capital flows, creating both opportunities and risks across asset classes. This analysis examines the evolving landscape of U.S. equities, focusing on sector-specific trends, market positioning, and macroeconomic implications.

Sector Rotation: Winners and Losers in the Trump Era

The third quarter of 2025 has already revealed a pronounced rotation toward sectors aligned with Trump's pro-business and protectionist policies. Technology remains the dominant force, with the sector surging 22% year-to-date, driven by the AI boom and falling interest rates, according to Morningstar's Q3 review. However, internal rotations within the Magnificent Seven highlight divergences: Tesla, Alphabet, and Apple have outperformed, while Microsoft and Meta lagged, according to a CBO report. This reflects a broader trend of investors seeking growth in innovation-driven industries, even as concerns about valuations persist.

Small-cap and value stocks have also seen a resurgence, with the Russell 2000 ETF (IWM) rising 5.6% in Q3 2025, according to a Morgan Stanley note. This broadening of market leadership suggests a shift away from the extreme concentration seen in large-cap tech stocks. Morgan Stanley analysts attribute this to Trump's emphasis on domestic manufacturing and infrastructure, which favor smaller, nimble firms, as noted by JPMorgan Asset Management in its analysis of the agenda's market impact (https://am.jpmorgan.com/us/en/asset-management/institutional/insights/portfolio-insights/strategy-report/parsing-the-market-impact-of-the-trump-economic-agenda/).

Conversely, healthcare and energy have underperformed. Energy stocks fell 8.4% in Q3 2025, dragged down by falling oil prices and uncertainty over the long-term viability of fossil fuel subsidies, according to the CBO. Healthcare, meanwhile, faces headwinds from potential policy shifts, including weakened Affordable Care Act (ACA) subsidies and stricter pharmaceutical regulations, as highlighted by Morgan Stanley. These sectors are likely to remain vulnerable unless Trump's agenda pivots to support clean energy or healthcare innovation.

Financials and industrials have shown mixed results. Bank stocks benefited from deregulation expectations, with JPMorgan Chase and Discover Financial Services rising on optimism about reduced compliance costs, per Morgan Stanley. However, industrials remain flat, as investors weigh the benefits of domestic manufacturing incentives against the risks of trade wars and supply chain disruptions, according to JPMorgan Asset Management.

Market Positioning: Aligning Portfolios with Trump's Policy Priorities

Trump's 2025–2026 agenda-centered on tax cuts, deregulation, and tariffs-has prompted a strategic reallocation of capital. Energy and financial services are now key beneficiaries. The Congressional Budget Office (CBO) projects that Trump's pro-fossil fuel policies will boost domestic energy production, potentially revitalizing firms like ExxonMobil and Chevron (https://www.cbo.gov/publication/61738). Similarly, financials are expected to thrive under reduced regulatory oversight, with Morgan Stanley noting that bank shares could see "meaningful gains" as compliance burdens ease (https://www.morganstanley.com/articles/trump-2025-top-market-trends).

Small-cap stocks are another focal point. Trump's emphasis on infrastructure and manufacturing has spurred inflows into smaller firms, which are perceived as better positioned to capitalize on domestic demand, per Morgan Stanley. However, investors must remain cautious: while small-cap equities offer growth potential, they are also more exposed to economic volatility and policy missteps.

The technology sector remains a double-edged sword. While AI-driven innovation continues to attract capital, Trump's proposed tariffs on Chinese imports and stricter social media regulations could disrupt supply chains and dampen growth in hardware and semiconductor firms, as Morningstar noted. Additionally, the sector's high valuations make it vulnerable to interest rate fluctuations, despite the Federal Reserve's recent rate cuts, a point emphasized by JPMorgan Asset Management.

Macroeconomic Implications: Growth, Inflation, and the Fed

The CBO forecasts a challenging near-term outlook, with real GDP growth projected to fall to 1.4% in 2025 due to tariffs and immigration restrictions (https://www.cbo.gov/publication/61738). However, the office anticipates a rebound to 2.2% in 2026 as the economy adjusts to Trump's policies. Inflation, meanwhile, is expected to rise to 3.1% in 2025 before easing to 2.4% by 2026, according to the CBO. These dynamics will shape the Federal Reserve's policy path, with analysts predicting a continuation of rate cuts in 2025 to offset inflationary pressures, as suggested by Morningstar.

Strategic Considerations for Investors

For investors navigating the 2025–2026 cycle, the key is balancing exposure to Trump's policy beneficiaries with hedging against potential risks. Energy and financials offer compelling long-term opportunities, but their performance will depend on the pace of deregulation and global trade dynamics. Small-cap stocks require careful due diligence to avoid overexposure to volatile sectors.

Technology and AI-driven industries remain critical to long-term growth, but investors should prioritize firms with strong balance sheets and diversified supply chains to mitigate trade war risks. Healthcare and renewables, while underperforming currently, could rebound if Trump's agenda evolves to include healthcare reforms or green energy incentives.

Conclusion

Trump's return to power has created a polarized but dynamic environment for U.S. equities. While his policies favor energy, financials, and small-cap stocks, they also introduce risks for sectors reliant on global supply chains and regulatory stability. As the 2025–2026 cycle unfolds, investors must remain agile, leveraging sector rotation strategies to capitalize on pro-Trump themes while hedging against macroeconomic uncertainties. The coming months will test the resilience of both markets and policymakers, with the ultimate outcome hinging on the balance between short-term disruptions and long-term growth potential.